THE IMPACT OF MICRO FINANCE INSTITUTIONS ON THE GROWTH OF

SMALL AND MEDIUM ENTERPRISES IN KAKAMEGA COUNTY

A CASE STUDY OF SMALL AND MEDIU M ETERPRISES IN KAKAMEGA TOWN

PREPARED BY;

Brian Simiyu BB01/SR/MN/5277/2017

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE AWARD OF A BACHELOR’S DEGREE IN
AGRICULTURAL ECONOMICS AND RESOURCE MANAGEMENT , FACULTY OF
SCHOOL OF BUSINESS AND ECONOMICS,MAASAI MARA UNIVERSITY
UNIVESITY.

June, 2021

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 DECLARATION
I hereby declare that this research project is my original work and has never been presented for
award of a degree in any other University.

Prepared and presented by:

Name Signature Date

Brian Simiyu …………………………………. ……………

This Research project has been submitted for examination with my approval as the University
Supervisor

Name Signature Date

Mr.Daudi Meah …………………………….

……………………..

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ACKNOWLEDGEMENT

This research project is a result of hard work, right guidance and support. We therefore would
like to thank sincerely all those who facilitated the realization of this worthwhile undertaking.

Firstly, our gratitude goes to our lecturer, Mr Meah for his informed guidance and
encouragement during the long and demanding journey which kept us focused throughout the
period. May God bless him abundantly without measure?

Secondly, we are also indebted to the entire Msasai Mara University and the community and in
particular the Department of Business and Economics for having nurtured as well throughout our
academic journey. We have been guided and challenged by their generous contributions towards
our academic excellence. We have also interacted with good hearted staff right from the
Departmental offices to the Library who have always been of help and greatly facilitated our
studies.

Lastly, although it is not possible to mention every one by name, we shall always appreciate
every one for the tremendous support and assistance. May God bless them abundantly. Also, we
cannot forget to thank our family members and close friends for their great support over the
years and the entire University Management for giving us a serene learning atmosphere.

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DEDICATION

I dedicate this proposal to our lovely supervisor Ms. Kitili for her unfailing guidance and assistance
that she accorded to us; to our parents; and to all our associates who contributed immensely in this
proposal to enable us garner more and more knowledge

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TABLE OF CONTENT

DECLARATION..............................................................................................................................i

ACKNOWLEDGEMENT...............................................................................................................ii

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

TABLE OF CONTENT..................................................................................................................iv

LIST OF ABBRIVATIONS..........................................................................................................vii

LIST OF TABLES.......................................................................................................................viii

LIST OF FIGURES........................................................................................................................ix

ABSTRACT...................................................................................................................................xi

CHAPTER ONE..............................................................................................................................1

INTRODUCTION TO THE STUDY..............................................................................................1

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

1.1.1. Microfinance Services....................................................................................................2

1.1.2 Growth of small medium enterprises............................................................................3

1.1.3 SMES scenario in Kenya.................................................................................................4

1.2 Statement of the problem.......................................................................................................4

1.3 Research Objectives...............................................................................................................5

1.3.2 Specific objectives...........................................................................................................5

1.4 Research Questions................................................................................................................5

1.5 Significance of the Study.......................................................................................................6

1.6 Scope of the Study.................................................................................................................6

1.7 The Conceptual Framework...................................................................................................7

LITERATURE REVIEW................................................................................................................8

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 2.0 INTRODUCTION.................................................................................................................8

2.1 Theoretical Background.........................................................................................................8

2.2. Microfinance Finance Services...........................................................................................10

2.2.1. Micro Loan Services....................................................................................................10

2.2.2. Micro Insurance............................................................................................................11

2.2.3 Training Services...........................................................................................................11

2.2.4. Micro Savings Services................................................................................................13

2.2.5 Advisory Services..........................................................................................................13

2.3 Growth and Development of SMEs.........................................................................................14

2.3.1 Sales Volume....................................................................................................................14

2.3.2 Profit Margin.....................................................................................................................14

2.3.3 Income Level.....................................................................................................................15

2.3.4 Expansion of new units.....................................................................................................16

2.4 Organizational factors..............................................................................................................16

2.4.1 Organizational Culture......................................................................................................16

2.4.2 Political Stability...............................................................................................................17

2.4.3 Climatic conditions...........................................................................................................17

2.4.4 Government Policies and Procedures...............................................................................17

2.4.4.1 Interest Rates policy...................................................................................................18

2.4.4.2 Taxation policy...........................................................................................................18

2.4.5 Size of the Firm.................................................................................................................19

2.4.6 Management Structure......................................................................................................19

2.5 Review of Empirical Studies...................................................................................................20

2.6 Summary of the Literature Review..........................................................................................21

CHAPTER THREE.......................................................................................................................23

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RESEARCH METHODOLOGY..................................................................................................23

3.1. Introduction.............................................................................................................................23

3.2. Research Set-up......................................................................................................................23

3.3 Research Design......................................................................................................................23

3.4 Population................................................................................................................................24

3.5 Sampling Procedure and Sample Size.....................................................................................24

3.5.1. Sampling procedure......................................................................................................24

3.5.2.Sample Size and Frame.................................................................................................24

3.6. Data Collection and Description.............................................................................................25

3.7. Data Validity and Reliability..................................................................................................26

3.8. Data Analysis..........................................................................................................................26

3.9. Data Presentation....................................................................................................................26

CHAPTER FOUR.........................................................................................................................28

DATA ANALYSIS, PRESENTATION AND INTERPRETATION...........................................28

4.0 Introduction..........................................................................................................................28

4.1 Data presentation of respondents.........................................................................................28

4.2 Rate of response...................................................................................................................28

4.2.1 Age of the SMEs Operators...........................................................................................29

4.2.2 Years of Operation of the Business (SMEs).................................................................30

4.2.3 Level of Academic Qualifications.................................................................................31

4.3 Monthly Sales Levels for the SMEs operators.....................................................................32

4.4 Monthly Incomes for SMEs.................................................................................................33

4.5 Monthly average expenses incurred by various SMEs........................................................35

4.5.1 Monthly loan repayment expenses of the various SMEs..............................................36

4.6 The membership in the MFIs by the respondents................................................................38

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 4.6.1 Benefits received by respondents from MFIs................................................................39

4.7 Businesses that sought finances from MFIs.........................................................................47

4.8. Saving options.....................................................................................................................51

4.9. Hypothesis testing...............................................................................................................54

CHAPTER FIVE...........................................................................................................................62

SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATION............................62

5.1 INTRODUCTION...............................................................................................................62

5.2 SUMMARY.........................................................................................................................62

5.3 CONCLUSIONS..................................................................................................................63

5.4 RECOMMENDATIONS.....................................................................................................63

REFERENCES..............................................................................................................................65

Appendices....................................................................................................................................69

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LIST OF ABBRIVATIONS
ADB: Africa Development Bank

CBD: Central Business District

EU: European Union

GDP: Gross Domestic Product

IEA/SED: Institute of Economic Affairs and Society for Economic Development

IPCC: Intergovernmental Panel on Climate Changes

KIPPRA: Kenya Institute for Public Policy Research and Analysis

KNBS: Kenya National Bureau of Statistics

KWFT: Kenya women Finance Trust

LBO: Local Banking Organizations

MFIs: Micro Finance Institutions

MSEs: Medium and Small Enterprises

OC: Organizational Culture

SMEDA: Small and Medium Development Authority

SMEs: Small and Medium Enterprises

TB: Table Banking

UNDP: United Nation Development Programme

USA: United Stated of America

VAT: Value Added Tax

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LIST OF TABLES
Table 1: Sample Framework..........................................................................................................25
Table 2: Rate of Response of SMEs..............................................................................................28
Table 3: Table illustrating age of SMEs operators........................................................................29
Table 4: Years of Operation of SMEs...........................................................................................30
Table 5: Profile on the level of academic qualification.................................................................31
Table 6: Profile on monthly sales levels........................................................................................32
Table 7: Average monthly income of the various SMEs...............................................................34
Table 8: Showing monthly average expenses incurred by various SMEs.....................................35
Table 9: Loan repayment expenses................................................................................................36
Table 10: Membership in the MFIs by the respondents................................................................38
Table 11: Profile on the benefits received by the respondents from MFIs....................................39
Table 12: Table showing response about training program...........................................................41
Table 13: Shows response about the micro loans provided by MFIs...........................................42
Table 14: Shows lending rates by various financial institutions...................................................43
Table 15: Response about micro insurance services provided by MFIs.......................................44
Table 16: Shows response about advisory services provided by MFIs.........................................44
Table 17: Response rate about micro saving services...................................................................45
Table 18: Profile on the purpose of the loan taken........................................................................46
Table 19: Action on defaulters......................................................................................................47
Table 20: Businesses that sought finances from MFIs..................................................................48
Table 21: Micro-Finance Institutions Issues..................................................................................48
Table 22: Number of respondents borrowing from MFIs.............................................................49
Table 23: Lending rates by various lending institutions................................................................50
Table 24: Profile on the terms of borrowing which guided the borrowing of the entrepreneurs. .50
Table 25: Table showing various saving options preferred by SME.............................................51
Table 26 : Impact of MFIs on the growth and development of SMEs..........................................52
Table 27: Response rate about impact of credit received from MFIs............................................53

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x
LIST OF FIGURES
Figure 1: Conceptual framework.....................................................................................................7
Figure 2: Response Rate from Sampled Regions..........................................................................29
Figure 3: Rate of Response of MFIs.............................................................................................30
Figure 4: Graphical Presentation of Monthly Income Levels of the various SMEs......................34
Figure 5: Graphical representation of monthly expenses..............................................................36
Figure 6: Graphical representation of loan repayment expenses...................................................37
Figure 7: Bar graph showing membership of MFIs by the respondents................................38
Figure 8: Bar graph showing benefits derived from MFIs by the respondents.............................39
Figure 9: pie chart showing beneficiaries of training programs....................................................40
Figure 10: Graph showing response of training programs............................................................41
Figure 11: Graphical representation of purposes of the loans taken.............................................46

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xii
 ABSTRACT
The study was set out to investigate the impact of Micro Finance Services on the growth and
development of Small and Medium Enterprises in Kakamega County, a case of Kakamega Town
which comprises of various SMEs necessary for the study.

The main objective of the study was to investigate the impact of Micro Finance Services on the
growth and development of Small and Medium Enterprises in Kakamega County. This was
further broken down into specific objectives which focused on the effect of micro loans, micro
savings, micro insurance, training services and advisory services on the growth and development
of SMEs in Kakamega Town.

There has been growth of SMEs in Kakamega town that need funds for their businesses but
cannot sufficiently get them from banks due to their small scale of operation and lack of
collateral. They can get funds from friends, own savings but this was not enough to cater for
their needs. The MFIs therefore come in handy to bridge this gap between demand of funds by
SMEs and the supply of funds.

The researchers focused on a population of 60 MFIs of which 6 will be selected and 340 SMEs
of which 34 will be selected in various categories; hotels, salons and boutiques, groceries and
retail shops. Primary data will be collected by the use of questionnaires and interviews. The data
collected from respondents was critically analyzed using descriptive analysis will be employed
to analyze data. This includes the use of table, charts, graphs, percentages and frequencies.
Hypotheses were tested using Chi square test. Recommendations for further studies were
outlined to enable willing and able potential researchers to exploit to ensure a significant growth
scale in this dynamic and demanding economy.

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 CHAPTER ONE

INTRODUCTION TO THE STUDY

1.1 BACKGROUND OF THE STUDY.

Small businesses are generally regarded as the driving force of economic growth, job creation
and poverty reduction. They have been the means through which accelerated growth and rapid
industrialization have been achieved. Koech (2011).

Micro and small enterprises (MSEs) have been recognized as socio-economic and political
development catalysts in both developed and developing economies. Mwangi (2011). Maals, et.
al, the important role it has played and continues to play. KIPPRA estimates that SMEs employs
many Kenyans and there contributes significantly to the economy through creation of
employment opportunities, producing large volumes of goods and services, increasing exports
and a fertile ground nurturing innovation and entrepreneurship skills.

In the USA and EU countries it was estimated that SMEs contributes over 60% in employment,
40-60 to gross domestic product (GDP) and 30%-60% to exports. In Africa, economic power
houses such as South Africa, Egypt, Nigeria and Kenya, the SMES sector estimated to contribute
over 70% employment and 30%-40% contributed to GDP but contribute less than 4% to export
earnings (World Bank report 2012)

The small and micro enterprises SMES play important role in the Kenyan economy. According
to the economic survey (2016) the sector contributed over 50% of the new jobs created in the
year 2016. Despite their significance, past statistics indicate that three out of five business fail
within first few months of operation (KNBS 2017) .Among the inexhaustible list of factors that
could enhance development of SMEs was adequate finances and financial related services are
important prerequisite in initiation, development and growth of business enterprises. Every
business whether large, small or medium requires some level of financing in order to sustain its
operations and expand. Financial institutions provide finance solutions to facilitate the fore
mentioned business requirements. With large business enterprises it’s not a difficult task to
obtain financing from financial institutions and hence can easily walk into banking facilities and

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get loans to finance their business operations. A survey done by the World Bank (2015) confirms
that generally large firms have access to bank credit and other financial services both local and
foreign than small firms.

Regarding the significant contribution of SMES to the economy can be measured in terms of
employment creation, production of large volume of goods and services, and a fertile ground for
nurturing innovations and entrepreneurship skills. This implies that for Kenya to realize and
sustain double digit economic growth as envisioned in the Kenya vision 2030 strategy, the
performance and competitiveness of MSEs must be increased and sustainable employment
opportunities, promoting economic growth and poverty reduction in the country. The research
sought to establish the relationship between financial literacy and the growth of MSES in Kenya.

1.1.1. Microfinance Services.

Microfinance has been defined as a development tool used to create access for the economically
poor to financial services at an affordable price (Oni, Paiko and Ormin, 2012). It involved the
provision of broad range of financial services to the low income group and micro entrepreneurs
to enable them build sustainable micro enterprises (Muktar 2009). It has been the concept of
provision of small size financial services especially but not limited to the lower segment of rural
and urban population. These financial services are provided by formal and informal financial
institutions: both small and large (Oni.et al. 2012). Microfinance is not just about giving micro
credit to the poor rather it has been an economic development tool whose objective was to assist
poor to alleviate poverty and become self-dependent. Micro finance institutions (MFIs) were
established to enable the poor without collateral security access credit funds at affordable and
friendly terms and small savers to accumulate wealth. (Govwami, 20th4).

Microfinance services refer mainly to small loans ,savings mobilization and training in micro
enterprise investment services extended to poor people to enable them undertake self-
employment projects that generate income. Micro finance came into being from the appreciation
that micro entrepreneur and some poorer clients can be ‘bankable’. That is, they could repay both
principal and interest, on time and also, make savings, provided financial services were tailored
to suit their needs (Leseyio, 2014). Micro finance has been perceived as the provision of
financial and non-financial services by Micro finance institutions (MFIs) to low income groups
without tangible collateral but whose activities’ are linked to income generating

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ventures(Ledgerwood, 1999). These financial services include savings, credit, payment facilities,
remittances and insurance. The non-financial services mainly entail training in micro enterprise
investment and business skills. There was also a belief that micro finance encompasses micro
credits micro savings and micro insurance (Leseyio, 2014).

1.1.2 Growth of small medium enterprises

One of the most important themes that come up in discussions about business was the subject of
growth .Majority of studies on growth have been undertaken based on the law of propionate
effects or Gibratis law which states that firm growth rate is independent of firms size. The
studies have therefore categorized business into three small, medium and large enterprises. The
available studies on growth have also used varied metrics to measure growth. Howard (2006)
laid out a framework describing how businesses grow. While he identified seven stages of
organizational, the first three stages of a particular importance and interest to small businesses.
Howard (2001). The first stage was that of new venture which when a small business was just
beginning. Markets and products are being developed in this stage. The second stage was
expansion and can focus on increased sales, revenues, market share and ultimately the number of
employee’s. Howard (2006).The third stage was professionalization and focuses on formalizing
the goals, processes and functions of the organization and was considered to be closely related to
expansion. Howard (2001).Stage four was consolidation and focuses on issues faced by firms
once they have made the transition to professionally managed organizations with working
systems in place ,focusing more on managing its corporate culture. Diversification was the fifth
phase, focusing on new products for markets for which the organization was already providing
goods and services. The sixth stage was integration, focusing on developing an infrastructure to
support multiple business units .The final stage was that of decline and revitalization and focuses
on rebuilding the organization at all levels, to ensure continued survival, Howard (2006).

Business growth was typically, defined and measured using absolute or relative changes in sales,
assets, employment, productivity, profit and profit margins. Therefore sales growth need not

3
correspond to or underpin other dimensions of growth in which policy makers might also be
interested: for instance sales can increase while employment and or profit fall. This was partly
related to contextual or structural issues such as sector or age of business but also to the strategic
choices made by principal decision makers in the firm. Sales and or employment growth was a
better of new and small business performance than accounting based measures such as profits,
return on investment or market share. Sales dates were usually readily available and business
owners themselves attach high importance to the sales as an indicator of business performance.
In practice, sales growth was also easier compared with some other indices and was much more
likely to be recorded. Sales were good indicator of size therefore growth sales may also be
considered a precise indicator of how a firm is competing relative to the market. Business owners
themselves often treated sale as key motivator and indicator of performance rather than for
example job creation, Koech (2011).

1.1.3 SMES scenario in Kenya.

Small and medium enterprises(SMEs) is an important sub sector for the Kenyan economy like
many other developing countries since it employs about 85% of the Kenyan workforce(about
7.5 million Kenyans of the current total employment). The current constitutional framework and
the new micro and small enterprises act 2012 (MSE act 2012) provide a new window of
opportunity through which the evolution of SMEs can be realized through the devolution
framework. However the impact of devolution on SMEs development depends on the
architecture of the regulatory and institutional framework inclined to support SMEs in an
economy. Ong’olo and Odhiambo (2013).

Lack of access to credit was a major constraint inhibiting the growth of SMEs sector. The issues
and problems limiting SMEs acquisition of financial services include lack of security coupled
with inappropriate legal and regulatory framework that does not recognize innovative strategies
for lending SMEs. Limited access to formal finance due to poor and insufficient capacity to
deliver financial services to SMEs continues to be a constraint in the growth and expansion of
the sector. Formal financial institutions perceive SMEs as high risk and commercially unviable.
As a result, only a few SMEs access credit from formal financial institutions in the country.
Various types of assistance have been provided to SMEs to boost their growth and development

4
by making them more profitable. ([IEA/SED](2001). Several organizations including business
associations, voluntary organization and other no governmental organizations have to enhance
the factors that influence development of SMEs especially as it relates to enterprise growth and
development of SMEs has not been satisfactory. Ventures have collapsed as soon as assisting
organizations pull out of project and remaining ones have remained small. Memba, et al (2012).

1.2 Statement of the problem.

The concept of business growth was still a grey area as there were yet to be a conclusive
approach and definite indicators of business growth despite the fact that it was every
entrepreneur’s wish to have their business grow. Small and micro enterprises (SMEs) play an
important economic role I many countries. In Kenya, for example the SME sector contributed
over 50% of the jobs created in 2005. Despite their significance, SMEs seem to evolve from
different Macro and Micro conditions. Among such challenges as revealed in many different
Macro and Micro conditions. Among such challenges as revealed in many studies may emanate
from financial challenges, a management or marketing limits in which many SMEs find
themselves in.

Various studies were also conducted in Kenya on SMEs and how they are influenced by
microfinance services. Mutuku (2010) studied on the impact of microfinance institutions on
SMEs in Kenya and found out that they had a great impact on employment creation and poverty.
Mbugua (2010) studying on the impact of micro finance services on financial performance of
SMEs. Ngugi (2009): Kioko (2009); Makena (2011) studied on the financial challenges faced by
SMEs and found that independences in access to finance are key obstacles to SMEs growth. A
survey of financial constraint’s hindering growth of SMEs by Koech (2011) found that the
factors affecting growth were capital markets cost of registration. Cooper (2012), studied on the
impact of microfinance services on the growth of SMEs in Nairobi and found a strong positive
Impact. No study had focused on the effects of Microfinance services on the growth of SMEs in
Kakamega County. Therefore, we felt the need for a study in this area and thus the study
intended to bridge this gap and focus on the effect of microfinance services on growth and
development of SMEs in Kakamega County.

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1.3 Research Objectives.

1.3.1 Main Objectives

To investigate the effect of Microfinance bank services on the growth and development of small
and medium enterprises.

1.3.2 Specific objectives.

The objectives of the study were to:-

i. Determine the effect of micro loans on the growth and development of SMEs.
ii. Examine the effect of Micro-finance services on the growth and development of
SMEs.
iii. Establish the effect of Micro saving service on the growth and development of SMEs.
iv. Investigate the effect of training service on the growth and development of SMEs.
v. Examine the effect of advisory service on the growth and development of SMEs.

1.4 Research Questions

To achieve the research objectives the study was guided by the following research questionnaire:

i. What is the effect of micro loan on the growth and development of SMEs?
ii. What is the effect of micro insurance services on the growth and development of
SMEs?
iii. What is the effect of micro saving services on the growth and development of SMEs?
iv. What is the effect of advisory services on the growth and development of SMEs?
v. What is the effect of Advisory services on the Growth and development of SMEs?

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1.5 Significance of the Study.
The importance of SMEs in economic development and poverty reduction cannot be ignored. By
undertaking the present study, the researchers established the practical role of perceived
solutions provided by microfinance institutions and how this affects growth of SMEs. The study
sought to recommend possible strategies that may help improvement of MFIs impact on SMEs.
The information from the study will act as feedback to microfinance institutions that provide
financial solutions to SMEs. This would facilitate formulation of strategy based on SMEs needs
but not out of general perception of what SMEs need. The study acted as awareness program
among SMEs owners and managers who Might not be aware of the services and products
provided by microfinance institutions.

Further the research provides information of the relationship between microfinance services
SMES growth which forms the basis of future studies and hence bridge that empirical gap that
exist in literature.

1.6 Scope of the Study

The study was conducted in the SMES in Kakamega county with high concentration of SMES
and available microfinance institutions .The issues that were covered under microfinance service
are micro-loans, micro insurance, micro saving services, business training services and advisory
services on the growth and development of SMES were determined in terms of sales volumes
stock level, profit margin and income level.

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1.7 The Conceptual Framework.

Figure 1: Conceptual framework.

The study was guided by conceptual framework in the figure 1. below

MICRO FINANCE SERVICES GROWTH AND DEVELOPMENT OF

SMES
 Micro loans
 Micro insurance  Sales volume
 Micro savings services  Profit margin
 Training services  Income level
 Advisory services  Expansion of new units

 Government policies and procedures

 Political stability.
 Climatic conditions
 Management structure
 Organizational culture
 Size of SMEs

Source: Self Conceptualization (2019)

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 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION
This chapter reviewed existing literature that relates either directly or indirectly to the study on
microfinance services and small and micro enterprises. The chapter has reviewed both empirical
and theoretical literature on microfinance and SME growth and development and the research
gaps identified. The chapter also has discussed the determinants of SME growth and ends with a
chapter summary.

2.1 Theoretical Background

A number of theories were essential in explaining the relationship between micro-finance
services and SMEs growth and development and why firms considered using services. The
theories include; Pecking Order Theory, Financial Growth Theory, Resource Based Theory and
Micro-Credit Theory.

2.1.1. Pecking Order Theory.

The pecking order theory was proposed by Myers (1984). It sheds light on the incentives that
drive SMEs capital structure decisions. This theory proposes that firms preferred to use internal
sources of capital first and will resort to external sources only if internal sources are inadequate.
Majority of SMEs start with internal financing before looking for external sources. However,
more often than not, internal financing is usually not adequate unlike in older firms which by
definition have had more opportunities to accumulate retained earnings than younger companies
and thus more funds are available to finance operational growth. Pecking order theory suggests
that those funds should be used before external capital sources are tapped. Holmes & Kent
(1991) found that small businesses experience a more intense version of pecking order in their
decisions because access to appropriate external sources of capital is limited. It has been noted

9
that small businesses’ differ in their capital structure but their intense reliance on pecking order
is only one of the variables that make small businesses financing decision unique.

When lending to small businesses, most financial institutions require the owners of the small
businesses to personally guarantee the loan. These personal guarantees allow the institution
recourse against the personal wealth of the small businesses owner in the event of default
(Berger and Udell, 1998). These restrictions on the type of finance available to SMEs coupled
with the small firm‘s insistence on first using internal sources of capital (Holmes and Kent,
1991), creates a unique structure for small business. Romano,(2001) describe the situation as a
complex array of factors that influence small to medium size enterprises (SME) owner-
manager‘s financing decisions. This was supported by Hall et al. (2000) who found that firm‘s
size is positively related to long-term debt and negatively related to short-term debt. In further
support, Chittenden et al. (1996) suggest that a firm‘s size is correlated with the firm‘s reliance
on pecking order theory in capital structure decisions. Thus, smaller firms are more likely to rely
on internal funds. Romano et al. (2001) found a significant relationship between the size of the
firm and the use of debt. Again, these results are consistent with pecking order theory and the
Berger and Udell (1998) model.

2.1.2 Financial Growth Theory

The theory was proposed by Berger and Udell (1998) to explain how firm’s financial needs and
financing options change as the business grows, becomes more experienced and less
informational opaque. They further suggest that firms lie on a size/age/information continuum
where the smaller/younger/more opaque firms lie near the left end of the continuum indicating
that they must rely on initial insider finance, trade credit and/or angel finance. The growth cycle
model predicts that as firm grows, it will gain access to venture capital (VC) as a source of
intermediate equity and mid-term loans as a source of intermediate debt. At the final stage of the
growth curve, the firm becomes older, more experienced and more informational transparent.

In line with financial growth theory, numerous empirical studies have found that inadequate
financing was the primary cause of SME’s failure (Jones, 1979; Coleman, 2000; Ochanda,
2014). The capital structure of smalls firm differs significantly from larger firms because small
firms rely more on informal financial market which limits the type of financing they can receive.
The small firm‘s initial use of internal financing creates a unique situation in which capital

10
structure decisions are made based on limited financing options. It was widely accepted that
small firms have different optimal capital structures and are financed by various sources at
different stages of their organizational lives (Berger and Udell, 1998). Researchers have found
that certain attributes of small firms influence the type of funds available to finance the firm‘s
operations (Hall et al., 2000, Romano et al., 2001).

2.1.3. Micro Credit Theory

Theoretical idea of micro credit has been derived from economic theory that forms the
foundation of the credit business in non-communist society. Adam Smith (1976) conceived this
theory in the eighteenth century that Self-seeking individuals are always eager to employ their
labor, capital and skills to their best interests, which eventually add up to the benefit of the entire
society due to the work of the “invisible hand”. Smith’s idea, later popularized as the theory of
capitalism by Karl Marx, describes the principles of material prosperity of the non-communist
society. The psychological component of micro credit theory known as “social consciousness
driven capitalism” has been advanced by most ardent promoter of micro finance Yunus (1994).
This theory argues that a species of profit-making private venture can be conceived that cares
about the welfare of its customers. In other words, it is possible to develop capitalist enterprises
that maximize private profits subject to welfare considerations of their customers (Ngugi and
Kerongo, 2014)

2.2. Microfinance Finance Services

Micro credit institutions have emerged as a substitute for formal financial institutions which have
limited the accessibility to credit by the poor due to lack of collateral (Chowdhury et al.
2008).Apart from credit facilities micro finance institutions still play pivotal in by offering micro
insurance, micro savings services, training services and advisory services to guarantee the
growth and development of SMEs in the contemporary society driven by the business world.

2.2.1. Micro Loan Services

These constitute borrowed funds with specified terms of repayment. People borrow when there
are insufficient accumulated savings to finance businesses.

11
Daou (2014) recon that there is considerable heterogeneity in the socioeconomic background of
borrowers as well as in the sources for start- up capital employed by micro enterprises. Moreover
there is clear evidence of liquidity in the market for start-up capital that could hinder the creation
of growth of small enterprises. Daou 2014 observed that the process of application for loans
starts with small amounts and it is only after repayment that the client can apply for the next
higher amount. This process is a limiting factor for those who need a larger amount right from
the beginning. This is true because it takes an unnecessarily long time for those seeking a large
loan to obtain enough funds to meet their needs. In addition to the time taken to receive large
loans the clients also raised concerns about the time frame from the receipt of the loan to the time
of starting repayment, which was just one week after the disbursement of funds in most cases.

In a study of NGOs and women small-scale entrepreneurs in the garment manufacturing sector of
textile industry in Nyeri and Nairobi Macharia & Wanjiru (1998), the factors that inhibit credit
availability to women include: lack of seed capital, lack of awareness of existing credit schemes,
high interest rates, lengthy and vigorous procedures for loan applications, and lack of collateral
security for finance. These factors have become a major barrier to the growth potential of
businesses owned by women.

According UNDP report (2012), SMEs in Kenya were able to acquire fixed assets and
technologies using MFIs. These revealed a positive significant relationship between amount of
loan and SMEs achievement of goals.

2.2.2. Micro Insurance

Micro insurance has emerged as the third pillar in the range of micro finance services and
relevant tools to address the vulnerability of less affluent people. Kenya has adopted the
definition of micro insurance given by the international insurance supervisors as the “insurance
that is assed or assessable to the low income population potentially by a variety of different
providers and managed in accordance with generally accepted insurance practice”. The insurance
regulation has within its mandate a developmental role and specific targets towards increasing
penetration of insurance in Kenya. A specific concern is that the insurance is only serving 8.4%
of the total population under long term insurance business (inclusive of those insured under
group life). Over 90% of the population is exposed to many risks in Kenya: many of which are
insurable and the poor are the most exposed. Currently, less than 10 insurance company offering

12
micro insurance products on a ‘window’ basis as part of their portfolio. The insurance companies
offering micro insurance are main stream selling the conventional insurance products Cooper
(2012).

In practice, micro insurance products take different forms. Here, we will divide them in three
groups: those linked to credit products, those insurance policies linked to saving products
including life insurance and insurance policies covering risk other than death and permanent
invalidity, but people and their properties in general ( Nkurunziza J. 2005).

For banks or MFIs in general, micro insurance schemes can help mitigate the negative effects of
bad debts on the quality of the loan portfolio since death and illness generally result in
outstanding payments. A step further is offering insurance to low income people to protect them
from risk and vulnerabilities other than death and invalidity, such as health, education or fire
with no specific link to a credit or saving product ( Evans, T. G.,Adams, A. M 1999).

2.2.3 Training Services

Storey (2013) argues that training services on business skills enhance performance. He
concluded that the most important factors of business success among entrepreneurs were: a
successful record of previous work history; strong analytical skills acquired in a broad
humanistic education; early investment in personal reputation and broad biographical experience
outside the narrow field of the profession; early socialization experiences functioning as
biographical resources in the discovery of successful business ideas; and a training on how to
communicate effectively with customers in an increasingly global and knowledge-based
economy.

Kisaka and Mwewa( 2014), established that Small and Medium Enterprise Development
Authority (SMEDA) organizes trading programs, workshops and conferences of short durations
in the country for raising awareness and capacity building of SMEs. These programs are aimed at
improving knowledge, skills and competencies in the technical, marketing, financial,
compliance, regulatory, legal and commercial functions. They help to improve major
performance indicators such as productivity, quality, competitiveness and sustainability thus
decreasing the level of SMEs mortality and increasing efficiency.

13
The MFIs train the entrepreneurs in the following areas:

2.2.3.1 Working Capital Management

Entrepreneurs were trained on how to manage working capital; this is the capital that is used to
meet daily business operations. It trains the entrepreneurs on how to balance between holding
cash and inventory. They are taught on how to keep stock levels that will not disrupt production.

2.2.3.2 Book Keeping/ Record Management

MFIs appreciate the importance of book keeping skills and execution in any business. They train
entrepreneurs in basic book keeping skills. The main books of account they are trained on is the
simple recording expenditure and receipt in a simple T-Format. Receipts include sales and any
income received while the expenditure takes care of all the cost of sales and all expenses. This is
important because it can enable the entrepreneur calculate his or her profit or loss after a given
period and also use to ensure control and budgeting. In addition to the book keeping,
entrepreneurs are trained on record management, store them for future reference e.g. by the use
of folder and keep records.

2.2.3.3 Customer Relation

MFIs trained entrepreneurs in customer relations and general public relations. Because in a
competitive world of free economy, one has to attract and retain customers if he or she wants to
survive. Here, one must use entrepreneur skills that are a must for success. This can be done
through supplying the right quality products and charging fair prices and ensuring that the goods
are always available when needed. There should also be good customer feedback.

2.2.3.4 Evaluating cost of finance

Entrepreneurs were trained on various sources of capital available to them like loans from banks,
loans from MFIs, personal savings and donations from families. Next is how to evaluate these
sources to pick the cheapest source e.g. trained on comparing various loan products from various
sources and conditions to be met by use of amortization tables. Penalties are hard to come by and
savings are hardly enough hence need to source prudently.

2.2.4. Micro Savings Services

Saving was not only important to private persons but it is also equally important for success and
growth of any business. While the business is making profit, the business owner should explore

14
starting a savings plan which can provide relief during tough times as well as for funding
investments.

A study by Zeller (1998) shows that for purposes of smoothing household consumption, liquid
savings are better as compared to other savings techniques. Savings can be withdrawn and used
in times of emergency as well as to cover healthcare. The growth of the household economic
asset portfolio can be realized through the use of savings accounts. Mobilization of savings
provides a means of funding investments. Capability to deposit and withdraw funds from a bank
reduces the need to use inconvenient techniques of savings. Whereas it is common to withdraw
cash from a business, the practice is not a good means of funding household expenses or
unanticipated business expenses. A savings account has the potential of enhancing the ability to
plan and cover such expenses.

The rapid evolution of microfinance, with specialization in lending small sums, is partly the
reason why the poor can borrow at all. Several MFIs also offer savings accounts. A prominent
example is Grameen Bank in Bangladesh. However, the sector remains credit dominated, and the
saving ability through an MFI often has a linkage to the customers' inclination to borrow funds
from it. According to a 2009 survey of 166 MFIs by Microfinance Information Exchange, all
advanced loans whereas just 27% provided savings facilities. The argument of those who
advocate for a wider range of financial services is that a better balance should be established
(Guichandut, 2006).

2.2.5 Advisory Services

These are extensional services offered by the MFIs to the SMEs. They help to define and meet
the overall objectives of the SMEs and MFIs through provision of advices which range from;
loan advice to investment advice. Before an entrepreneur applies for any kind of loan he must
choose carefully, choosing the right investment and advance can pose a dilemma. But to get the
best deal you need to do some careful research. Interest rates vary from 6% to 14.5%.

MFIs help you make an informed decision about what kind of service to buy, and who to buy
from and this will depend on; the amount to be borrowed, the interest rate, the type of rate, the
term of the loan, deposit, associated fees, and insurance required by the lender. This enables the
Small and Medium enterprises to acquire the best loan services with the lowest interest to be

15
paid, lucrative investment available, and mode of investment to realize a higher returns. These
services go along in backing up the sustainable growth and development of SMEs.

2.3 Growth and Development of SMEs

2.3.1 Sales Volume

Sales volume directly affect the performance of Small and Medium enterprises, the more the
sales the greater the profit and consequently growth and development (Mk Nelly & Stock,1998).
This is because sales volume purports increase in revenue which ideally leads to increase in
income which is then used to finance the business to scale in higher heights in the growth chain.

Ofori (2014) analyzed the effect of micro-finance loans on productivity and growth in Ghana and
highlighted that the clients put the MFI loans to good use and clients with a higher number and a
higher average size of MFI loans were found to have higher growth rates than other enterprises.
A cross-sectional analysis of sales revenue showed that SMEs with MFI loans generated higher
sales revenue.

Kisaka & Mwewe (2014) concur that SMEs make significant growth after assessing loans and
recommend that other SMEs should follow suit, if the country is to achieve its vision 2030. Lack
of finance was one of the main reasons for SMEs poor performance in most developing countries
(Terungwa, 2012). Cooper (2012) established that SMEs largely depend on micro-financing for
growth. A significant percentage of SMEs were found to seek and have access to micro credit for
their businesses sales volume increase. The researcher also established that micro-finance
services have assisted enterprises to change their status through growth in sales level from micro
to small and from small to medium.

2.3.2 Profit Margin

The purpose or goal of any firm is to make profit and growth. A firm was defined as an
administrative organization whose legal entity or framework may expand in time with the
collection of both physical resources, tangible or resources that are human in nature ( Penrose,
1995). The term growth in this context can be defined as an increase in size or other objects that
can be quantified or a process of changes or improvements (Penrose, 1995). The growth of a firm

16
can be determined by supply of capital, labor, appropriate management and opportunities for
investments that are profitable.

Profitability was one of the important measures of growth that must be considered as it was
unlikely that enterprise growth can be sustained without profits being available for reinvestment
in the enterprise. Growth can be considered in terms of net profit margins. According to Stewart
and Hodgkin son (1991), if the definition of enterprise was considered as the creation of rents
through innovation where rents are defined as above average earnings relative to competitors,
then profitability measures are mostly attractive.

SMEs face financial constraints which in turn impede their growth chain. Profits accrued can be
ploughed back in the business to serve as additional capital that propels the growth and
development. It again sets out the tone for the SMEs to assume the going on concern because
making losses overtime leads to cessation of their operation indefinitely. Thus, profitability can
be viewed as both motivational and growth and development factor.

2.3.3 Income Level

The income related effects of small loan programs can be viewed in ways in which small-scale
lending programs directly affect borrowers’ income. These direct effects comprise, on the one
hand, the interest rate differential between the program’s loans and alternative sources of
financing, and, on the other, the additional profits that entrepreneurs are able to make because
they have been able to expand their businesses by using the borrowed funds (Tschach, 2003).

When examining income effects of microfinance programs, it is important to recognize that there
is a significant difference between decreasing income and reducing poverty. Despite the
prevalent emphasis of raising income as the central objective of the development programs, the
two are not synonymous (Carney, 1998). Increased income may fail to yield the desired outcome
as it is often gambled away. The use to which income is put is important in determining the
impact of microfinance inventions. Microfinance can potentially reduce vulnerability by helping
micro-entrepreneurs to diversify their income sources and improve household money
management.

17
Income level again provides an insight when evaluating the growth and developments of SMEs.
Various studies that have been conducted purports that income level is a significant
denomination that is, according to an evaluation study by ADB (2007), the availability of micro
credit loan had positive impact on the income of the clients. The income of those who received
micro credit loans increased by an equivalent of ksh.9200 per year compared to those that did not
receive the loan.

2.3.4 Expansion of new units

As a firm grows and develops, they tend to maintain a sustainable pace of growth and
development by devoting considerable amount of time and resources to identify niche markets.
These markets may spring up as a result of demographic factors that positively correlates with
the potential revenue net depicted.

This was evident by the expansion rate of the SMEs through new branches opening,
diversification of business, enlargement of the enterprise and division of labor in the SMEs. In
terms of specialized units, SMEs can open more branches in different geographical areas or just
within the same geographical area, initiate specialization and division of labor in their service to
serve more customers and enhance service delivery and availability of the goods. This could also
be measured through the following measures; turnover, pre-tax profit, return on net assets and
return on capital investment turnover

18
2.4 Organizational factors
These are elements within a microfinance institution that enable it provide its services to its
clients, in this respect small and medium enterprises, optimally and at favorable rates.

2.4.1 Organizational Culture

Organizational culture (OC) has been defined by different scholars in different situations and
contexts (Kale,1991). According to Phatak (1989) organizational culture was defined as the way
of life of a cluster of people. It was made up of knowledge, morals, belief, norms and values and
any other abilities gained by one as a fellow of a given society. In other words, it was considered
as the unique way of life of a group of people and their comprehensive way of life. According
Lai and Lee (2007) organizational culture is seen as a collective set of values that encourages
organization's values, opinion, preference and response. Hofstede (1994) defined culture as “the
collective programming of the mind which differentiates the members of one group from that of
another “. Culture refers to shared traditions, values, and norms (Schein, 1994). Cameron and
Quinn (2006) saw OC as a persistent set of values, beliefs, and assumptions that described
organizations and their members, while Chin-loyand Mujtaba (2007), and De long and Fahey
(2000) viewed organizational culture as a pattern of norms, values, beliefs and attitude that
influences behavior within an organization.

2.4.2 Political Stability

Economic growth and political are deeply interconnected. On one hand, the uncertainty
associated with an unstable political environment may reduce investment and the pace of
economic development,. On the other hand poor economic performance may lead to government
collapse and political unrest. However, political stability can be achieved through oppression or
through having a political party in place that doesn’t have to compete to be reelected. In this case
political stability was a double edged sword. While the peaceful environment that political
stability may offer is a desideratum, it could easily become a breeding ground for cronyism with
impunity. Such was a dilemma that many countries with a fragile political order may have to
face. Thus, the growth and development of SMEs directly influence economic growth which
relates to the state of political stability in a country. Hence political instability significantly
hampers SMEs growth since it creates hurdles in the economy (World Bank Report, 2014).

19
2.4.3 Climatic conditions
Countries and communities around the world are already experiencing increased climate change
impacts- including droughts, floods, more intense and frequent natural disasters, and sea level
rise. According to the latest (IPCC) report, the climate consequences of a 2 degrees world are far
greater than that of 1.5 degree.

The impact of climatic change is already being felt in form of reduced yield and more frequent
extreme weather events that affect SMEs operations. Climate action offers a major opportunity to
ensure sustainable global development and boost economic growth. It is already delivering real
results in terms of new jobs, economic savings, competitiveness and market opportunities, and
improved wellbeing for people worldwide with even greater investment, innovation and growth
potential ahead(World Bank Report, 2014).

2.4.4 Government Policies and Procedures

It could be viewed on two fronts that is, interest rates policy and taxation policy. These two
factors have a direct influence in the economic environment in which SMEs operates, they affect
the cost of borrowing, prices of goods and services as well as licensing fees. These further
impose various constraints as far as the growth and development is concerned as discussed
below;

2.4.4.1 Interest Rates policy

The areas of economic policies relate to interest rates. The level of interest rates is determined by
a government appointed group. A rise in interest rates raises the costs to business of borrowing
money, and also causes consumers to lower their expenditure (leading to a fall in business
sales).High lending rates affect business because they influence both their own direct costs and
the ability of their customers to borrow and spend. Though these capital-intensive businesses can
transfer the extra cost incurred from borrowing expensive loans to the consumer through pricing
power, experts say it’s unfortunate many of them have the least price elasticity and are least able
to offset increased borrowing costs with higher prices. Since SMEs often borrow short term
loans to cover shortfalls in expenditure, higher interest rates will translated to costly shortfalls,
since the businesses will have to pay more interest back to lenders. This was in one way or the
other led to a drop in borrowing by the SMEs, which again led to either production of
substandard products and services or the hike of prices.

20
2.4.4.2 Taxation policy
The tax plays important role in the growth of Small and Medium Enterprises (SMEs). In the low-
income country like Kenya, role of SMEs was critical in pushing the socio-economic
development agenda of the country further. Therefore, alignment of the tax-system to the
environment specific SME growth needs can be considered an important agenda for the policy
makers. Keeping this issue at focus, the study aimed to explore the managers/executive officers‟
perception of tax-system effectiveness in promoting SMEs growth in the Country.

Taxation policy has an effect on and business costs directly, for example, an increase in
corporation tax (on business profits) has the same influence as a rise in costs. Enterprises can
pass some of this tax on to consumers in higher prices, but it will also have an effect on the
bottom line. Other business taxes include VAT. VAT is actually passed down the line to the end
user but the administration of the VAT system is a cost for business. Some of the SMEs do not
make high profits hence with high taxes in places they are unable to sustain themselves leading
to their closure. Assessing the impact of tax systems on SMEs is not simply a matter of looking
at tax rates. Tax systems play an important role in encouraging growth, investment and
innovation and facilitating international trade and mobility. For SMEs key considerations are to
minimize administrative burden while ensuring compliance, including considering the drivers
and impacts of operating in the informal economy.

2.4.5 Size of the Firm

Smaller firms exhibit larger degrees of information asymmetry between insiders and outsiders. In
addition, these firms also face higher costs in issuing new equity (Sebastian 2010). Large firms
are more likely to manage their working capitals more efficiently than small firms. Most large
firms enjoy economies of scale and thus are able to minimize their costs and improve on their
financial performance (Kumar, 1995).

21
There are a number of ways that can be used in measuring the size of a firm. Sales turnover is
one of the measures that can be used. Sales turnover (Sales revenue) is the money that you get
from the sale of products and thus the costs of sales have not been deducted from this. Number
of employees, is one of the simplest measures to know about the size of the firm, capital
employed by a business and can vary depending in the size of the business.

A small business needed less capital to finance its investment, whereas, a large business
enterprise will need a lot of capital to plan and finance the investments. (Pandey, 2005). Some
Microfinance Institution targets only one sector where as others provide product and services for
more than one sector. Their actions are determined by their objectives and the impact they wish
to achieve (Ledgerwood, 1999). The size of the microfinance institutions is also measured in
terms of the level operating activities.

2.4.6 Management Structure

Lysons (2006), contingent theory states that there is no best way to organize the organizational
structures and control systems adopted for a particular enterprise and for functions or groups of
activities within the enterprise depend on or contingent on the external environment in which the
enterprise operates.

Burns & Stalker (1968), identify two basic structures derived from the ways in which the
activities of an enterprise can respond to the environment. In mechanistic structure, authority is
centralized at the summit of the managerial hierarchy and vertical authority is used to control
human and material resources.

In organic structure, authority was decentralized, employees are empowered to respond

effectively to the unexpected and departments are encouraged to share other resources and take
across functional perspective.

The need to physically locate people and units together to ensure coordination and supervision or
to choose between centralized or decentralized structures was also increasingly invalidated by
information technology with a consequent focus on projects and processes rather than procedures
and tasks.

22
2.5 Review of Empirical Studies
Nilsson (2010) conducted a study to investigate the impact of micro finance institutions (MFIs)
on the development of small and medium size businesses (SMEs) in Cameroon. The study
adopted a case study approach that involved the Cameroon Cooperative Credit Union League.
The study concluded that microfinance is an important asset to developing countries since it was
able to cater for financing needs of the very poor in the society.

Owusu (2002) investigated on the various financing options for SMEs in Ghana, a random
sample of 10 formal and informal finance sources and 50 SME‟s in 6 selected small and medium
industries in Kumasi, Accra and Tamale. A regression model was used for data analysis, the
results of the regression analysis found that micro finance credit was 24 the major source of
income for SMEs. A positive correlation was shown between access to credit and financial
performance of SMEs.

Idowu (2004) conducted a study on the impact of Microfinance on Small and Medium
Enterprises (SMEs) in Ghana. The findings of the study reveal that significant number of the
SMEs benefitted from the MFIs loans even though only few of them were capable enough to
secure the required amount needed. Interestingly, majority of the SMEs acknowledge positive
contributions of MFIs loans towards promoting their market share, product innovation achieving
market excellence and the overall economic company competitive advantage.

Bran &Woller (2010), carried out a study to establish the effects of microfinance in India. The
study concluded that microfinance has brought better psychological and social empowerment
than economic empowerment. The study further recommended that the impact of microfinance is
commendable in courage, self-confident, self-worthiness, skill development, awareness about
environment, peace in the family, reduction of poverty improving rural savings, managerial
ability decision making process and group management. In other variables the impact is
moderate. As a result of participation in microfinance, there was observed a significant
improvement of managerial skills, psychological wellbeing and social empowerment. It was
recommended that the SHGs may be granted legal status to enhance the performance.

23
Wachira (2011) investigated the factors that influence the use of microcredit amongst the SMEs
based at Mutindwa market of Buru Buru estate. Descriptive survey approach adopted in this
research for primary data collection involved administration of a 25 questionnaire to the SMEs.
The study found out that there is a strong relationship between MFI loan use and the loan terms
and conditions. MFls loans were noted to be popular because of their group lending model where
security was by group guarantee demonstrating the fact that a majority of the loan consumers
who are commonly women lacked tangible collateral. The study concludes that improving the
lending terms and conditions especially through exploring a wide range of security options,
pursuing a gender parity client-base and offering diversified business knowledge in favor of
small-scale enterprises would provide an important avenue for facilitating their access to credit
and accelerate the use of MF loans and the subsequent enterprises.

Cooper (2012) conducted a study on the impact of micro-finance services on the growth of
SMEs in Kenya. The study targeted 50 SMEs in Nairobi. The researcher used self-developed
questionnaire as an instrument of data collection and analyzed the data using quantitative
analysis. The study established that SMEs largely depend on micro financing for growth. A
significant percentage of SMEs was found to have access and do seek micro credit for their
businesses. The study also established that microfinance services have assisted enterprises to
change their status through growth in sales level from micro to small and from small to medium.
Though SMEs have easy access to micro finance services, the study indicated that they have no
exemption from strict requirements when applying for loans. The study also established that
most SMEs in Nairobi do not demand for micro-insurance services and that Microfinance
Institutions offer minimal training to SMEs. The study concluded that microfinance services
have a strong positive impact on the growth of SMEs in Kenya. SMES in Nairobi depend on
micro financing for growth. The study recommends that there is need to relax the requirements
for loan application and that the government of Kenya should provide a favorable environment
that can allow MFIs to thrive not only in Nairobi but also in other parts of the country

24
2.6 Summary of the Literature Review
From the literature review, it was evident that micro finance services have a significant influence
on the growth and development of SMEs. Financing of small and medium scale enterprises is
essential for creating employment and economic growth. The literature review discussed above
has shown that microfinance services such as micro loans, micro insurance, micro saving
services, training services as well advisory services are important for growth and development of
SMEs which can be deducted from sales volume, profit margin, income levels and expansion of
units. However, it was important to note that SMEs do not operate in a vacuum, but in an
environment consisting of micro and macro factors that impose various challenges that affect
growth and development of SMEs. These factors constitute of government policies and
procedures, political stability, climatic conditions, management structure, organizational culture
and the size of the entity.

25
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1. Introduction
Methodology refers to the application of the principles of data collection methods and
procedures in any field of knowledge to help answer the research questions. This chapter
discusses the procedures which were followed in conducting the study. The chapter contains the
research design, population of the study, sources and type of data, sampling design, data
collection and data analysis.

3.2. Research Set-up

The research was conducted in Kakamega town and it involved SMEs and MFIs. Though there
have been some researchers conducted in Kakamega town which majorly focused on small
businesses run by Women enterprises, few of such researches carried out focused on the effect of
SMEs in Kakamega town. The rise in the number of small businesses within Kakamega and
likewise the number of MFIs that have branches in Kakamega provided the opportunity to
undertake the research and find out their relationships

3.3 Research Design

Research design is the plan and structure of investigation so conceived as to obtain answers to
research questions (Kothari, 2008). The study adopted a descriptive survey design with both
quantitative and qualitative data collection methods. Creswell (2003) observes that a descriptive
research design is used when data are collected to describe persons, organizations, settings or
phenomena. The design also has enough provision for protection of bias and maximized
reliability (Kothari, 2008). A descriptive study is concerned with determining the frequency with
which something occurs or the relationship between variables (Cooper & Schindler, 2003).

26
The research study used both aspects of quantitative and qualitative research approaches as the
questionnaire had open ended queries that gave room to the respondents to openly express their
opinions on the research topic.

The categories of SMEs selected for the purpose of the research were retail shops, hotels, salons
and boutiques and grocery class of business. Since there were various classes of SMEs in the
targeted region, we cannot research on the entire population. It was expedient to focus on the
four classes of enterprises.

3.4 Population
Population refers to an entire group of individual or objects having common observable
characteristic. According to Cooper and Schindler (2003), a population is the total collection of
elements about which we wish to make some inferences. The idea is not far from Mugenda and
Mugenda (2003) view which define a population as the entire group of individuals, events or
objects having a common observable characteristic. It should be ensured that population selected
is representative and that everyone has an equal chance to be included in the final sample that is
drawn according to (Mugenda and Mugenda, 2003).

The study population consisted of all small and microenterprises in Kakamega town. The SMEs
from which the study population was extracted were Lurambi, Amalemba, Kakamega C.B.D,
among others. The target population was 60 for MFIs and 340 for SMEs.

3.5 Sampling Procedure and Sample Size

3.5.1. Sampling procedure

Anderson (1989) also points out that sampling is the selection of some units of population to
represent the whole aggregate and hence one must certain that the sample members are typical as
possible in relation to the objective of the study. The researchers used probability sampling
techniques in selecting the MFIs and SMEs to be considered as representatives. According to

27
MugendaI(1999), at least 10% of the total population in question should consist the members per
sample in a research.

3.5.2.Sample Size and Frame

Sample size is a given number of members or cases from the accessible population which is
carefully selected so as to be a representative of the whole population with the relevant
characteristics. A sample is therefore a smaller group obtained from the accessible population
(Mugenda and Mugenda, 2003).

The sample consisted of 40 MFIs and SMEs in Kakamega town. These financial institutions
included 6 MFIs namely; Faulu Kenya , KWFT, Jamii Bora, Blue Limited Opportunity Kenya
and thirty four (34) SMEs where ten (10) were retail shops, seven (7) Hotels, twelve (12) saloons
and boutiques while five (5) were groceries

Table 1: Sample Framework

Name of Respondents Target Population Sample Size (10% of Target
Population)
MFIs 60 6
Retail Shops 100 10
Salons and boutiques 70 7
Groceries 120 12
Hotels 50 5
Total 400 40

3.6. Data Collection and Description

The main instruments for data collection were of questionnaires. According to Kathuri and Pals
(1993), the questionnaire is an ideal instrument to gather descriptive information from a large

28
sample in a fairly short time. It can also be answered at the convenience of the respondent and
picked at a later time.

The questionnaires were administered through interviews to ensure accuracy of the information
provided. The instrument was divided into three Parts. SECTION 1 questions covered
biographical data relating to SMEs’ area of operation, age, number of years in operation, gender
and the type of organization. SECTION 2 covered questions relating of MFIs that were filled by
them .SECTION 3 covered organizational issues that were responded to by both MFIs and
SMEs. The questionnaire contained 26 questions, 12 of which required responses from MFIs
while 14 from SMEs. A total of 40 questionnaires were distributed whereby 34 w to SMEs and 6
to MFIs. Secondary data was collected by studying relevant journals from MFIs- The pillar
(2009, 2010) issues.

The data collected helped in answering the research questions in relation to the impact of
microfinance services on growth and development of SMEs. They covered the elements that
contribute to the growth and development of SMEs

3.7. Data Validity and Reliability

Validity refers to the appropriateness, meaningfulness and usefulness of the specific inferences
researchers make based on the data collected. Reliability measures the level to which the
research instruments yield consistent results or data after repeated trials (Kothari, 2008). Validity
determines the relevance of the data in achieving the research objectives. Validity was achieved
by structuring the questionnaire in a way that all the study variables were captured. Validity is
defined as the accuracy and meaningfulness of inferences, which are based on the research
results (Mugenda and Mugenda, 2003). Reliability of the data was achieved by administering the
questionnaires to the respondents most of whom were not very literate and any inconsistencies
would be corrected at point of data collection. The researcher vetted the information provided
and ensures that accurate information was provided.

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3.8. Data Analysis
Data analysis involves organizing, accounting for and explaining that data; that is making sense
out of data in terms of respondent’s definition of the situation noting patterns, themes, categories
and regularities (Kothari, 2008)

The data collected were edited for accuracy, uniformity, consistency and completeness. After
editing, descriptive analysis was employed to analyze data. This includes the use of table, charts,
graphs, percentages and frequencies.

Hypotheses were tested using Chi square test.

3.9. Data Presentation

The data were presented in tables, pie charts and graphs and relevant explanations.

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