Impact of Micro Finance on Small Enterprises

It’s hard to survive as a business in the present era in Kenya if the products you are providing don’t fit or rather appeal to the masses who are largely the unemployed and low income micromanage products targeting these group of people and their micro and small enterprises. Some of the innovations in the financial services sector as a result of micromanage include the new concept of Agency banking, M-Shari, M-Peas which have all proved to be a success especially with the majority of those previously not in he formal financial systems.

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Micro and Small enterprises provide a vital source of income and employment for many Kenya. According to the national micro and small enterprise baseline survey of 1999, there are close to 1. 3 million MESS employing nearly 2. 3 million people or 20% of the country’s total employment and contributing 18% of overall GAP and 25% of non-agricultural GAP. Despite this important contribution, the formal financial services sector has traditionally shunned the Mess, perceiving them as very risky leading to only 10. 4% of the ME’S receiving credit and other financial services.

The credit denied can help the poor who mainly make up the micro and small enterprises to accumulate capital and investment in employment generating activities Hosing (1988). According to Grade (1984), loans enable the individual’s member or enterprises to enjoy the benefit of economies of scale and new technology. Availability of credit to small business and low income households could greatly enhance their economic strength and eventually break the vicious circle of low income – low saving – low investment – low income Yuan’s (1984).

The growth and development of micro and small enterprises in developing countries s mainly inhibited by access of finance, poor managerial skills, and lack of training opportunities and high cost of inputs Cook and Nixon, (2000). Further studies conducted suggest that finance is the most important constraint for the MESS sector (Green et al. , 2002). The MESS have very limited access to financial services from formal financial institutions to meet their working and investment needs Keys and Teem (2009).

Mess are usually characterized by few assets and informal operations which do not help their case with traditional financial institutions and commercial banks in terms of collateral for loans issued. Where credit is extended after passing rigorous qualifications, very stringent measures are put in place to ensure that the Me’s actually payback. These measures which include exorbitant interest rates coupled with short repayment circles prove to be quite punishing and strenuous to the enterprises and may eventually lead to defaults resulting to losses to both the banks and the enterprises.

This pushed the MESS to informal financial services which included loan sharks, savings groups among others. Their services may not be actually better but their informal nature and understanding of the Me’s needs made hem preferable to the formal financial services sector. Though these informal services are still commonly used countrywide, micromanage has now become a significant part of these enterprises. Various Micromanage institutions came up to fill this need by small and micro enterprises for banking and credit services that were not sufficiently provided by the informal providers.

The major players that distinguished themselves in this industry include Fault Kenya, Kenya Women Finance Trust( SWIFT), Pride Limited, Wowed Limited, Small and Medium Enterprise Programmer(SEEM), Kenya Post Office Savings Bank(POSTAL), Vintage Meaninglessness’s Trust), Raffia Deposit Taking Micromanage, Remy TM Limited, OWES Deposit Taking Micromanage Limited, Century Deposit Taking Micromanage Institutions came up with micro finance services to the low income groups especially women and the youth to enable them start or develop income generating activities that could be classified as micro and small enterprises.

The response to these institutions was very impressive and according to the Annual Report 2008 by Central Bank of Kenya, it is estimated that micromanage is the new source for loans, savings and insurance for the estimated 38% of Kenya who do not eave access to any type of financial services and the 35% of Kenya who might be unhappy with the informal financial services they use. It is important to assess the impact of micromanage as provided with these institutions to micro and small enterprises.

With this impressive response, commercial banks that had previously shunned these group as risky and not commercially viable also started to provide micromanage. Gawk and Suzuki (2000) pointed out that bank do not want to offer loans to MESS because the nature of loans required is too small and those banks find it more expensive to offer such loans. According to Charging and Occasion (1999), most formal institutions regard low- income households as too poor to save, and are not personally known to them , do not keep written accounts or business plans, they usually borrow small and uneconomic sums.

The micromanage sector has proven to be profitable over the years leading to the trend of commercial and financial institutions scaling down their products and even setting up subsidiary companies to specifically engage in the micromanage business as was noted in the Central Bank of Kenya report, Bank Supervision Annual Report 2010. This has seen the rise of stiff amputation by the various players in the micromanage industry much to the gain of the previously unbaked and under banked.

Micro and Small enterprises suddenly have many micromanage products tailored for them as never seen before. Their integration into the formal financial services system has significantly improved with the rise of micromanage in the country. Though micromanage has made major strides, the potential of expanding its use in the country is still significant since about 18 million people, translating to about 60% of the population, are poor and not in the formal financial services.

The ability of the Micro and Small enterprises in accessing financial products through micromanage has an impact in their businesses in terms of becoming more competitive, improving their working capital, increasing revenues, imparting of financial management skills, realizing their full growth potential through product diversification and even through operational and geographical expansion. This study seeks to examine this impact of micromanage to Micro and Small enterprises.

To achieve concrete growth and development in the country, the government needs adequate capital which is attained by improving the nation’s investment and savings habit. In raising this capital, the government has identified the micromanage industry as crucial player in its financial inclusion efforts. In its Vision 2030, the financial sector was identified as one of the key priority sectors in realizing the vision with its role being the manipulation and channeling of resources needed in the expansion of the economy. Micromanage is set to be crucial and pivotal in fulfilling this need.

The Micromanage Act 2006, which became operational with effect 2nd May 2008, also goes to show the increasing importance of the accordance industry to the government and the country as a whole. The Act sets out Kenya with the principal objective of regulating the establishment and operations of the Micromanage Institutions in Kenya through licensing and supervision Micromanage is indeed huge and mainstream in Kenya and it is essential to find out if its impact to its primary target, the micro and small enterprises is indeed as was envisaged: empowering the enterprises financially. 1. Statement of the Problem It is generally assumed that micromanage is a cheap means of Small and Micro enterprises meeting their financial needs. This conclusion is usually arrived at after considering only the direct cost which is the interest rates charged on the micromanage loans with very little knowledge on the actual cost for Me’s to access these services. The indirect costs also referred to as transaction costs include the process of obtaining information about the services and the whole process of applying for the loan, cost of getting transportation to make loan payments, time spent obtaining loan and tracking the debt.

These costs can spiral out of control given the bureaucratic procedures and time involved in processing loans as was included by a study done by Chi]oaring and Occasion (1999). The study also pointed out that asymmetric information between borrower and lender is very high and this led to Micromanage providers imposing tight monitoring and supervision rules to borrower which can be strenuous and costly to the business. Despite all the challenges posed by these indirect costs of sourcing and servicing the loans, Micro and Small enterprises in Kenya still prefer micromanage products for their businesses.

Some of the local studies done in this area include a research on Impact of Micromanaging on Performance of Small and Medium Enterprises (Seems’) in Sums central business district, Kennedy, N. (2010) whose finding was that in Kenya like in many other countries, approaches to the regulation of MFC are complicated by the fact many institutions are involved in providing MFC services under different legal structures. This presents a challenge in identifying an appropriate regulating approach, which is conducive to the development of the sector while providing adequate facility to the MFC activities.

Another local study was the Effect of Micromanage Services on the Financial Empowerment of Youth in Micro County, Kenya done by Charles O. Indoor and Dorian Omen both of School of Business and Economics, Masses University which came to the conclusion that Micromanage services have had no much effect on the savings, income and investment of the recipients of the credit facility. In these studies none has really gone out to find the effects of these indirect or transaction costs on the Me’s.

It is therefore important to ask if micromanage have impact on the financial empowerment of MESS given these indirect or transaction costs associated with micromanage. This study therefore seeks to investigate the impact of micromanage service on the financial empowerment of MESS in Kenya and to investigate the benefit received from micromanage services if they outweigh the cost incurred by Me’s when consuming the services. 1. 3 Objectives of the Study 1. 3. General Objective The general objective of this study is to investigate the impact of Micromanage on financial empowerment of Micro and Small Enterprises in Kenya. 1. 3. 2 Specific effect of micromanage on the income, savings, investments and financial management skills of Micro and Small Enterprises in Kenya 2. To establish the significance of direct and indirect costs that micro and small enterprises incur when consuming accordance products. 1. 4 Research Questions The study will seek to respond to the following questions: 1 .

What is the effect of micromanage on the growth, development and sustainability of small businesses in Kenya? 2. What are the direct and indirect costs that micro and small enterprises incur when accessing the micromanage services? 1. 5 Significance of the Study The findings of this study will be useful to various stakeholders including: 1. Researchers Findings of this research will assist academicians in broadening of the syllabus with respect to this study hence providing a deeper understanding on the impact of accordance on micro and small enterprises. 2.

Micromanage Institutions The findings of this study will help micromanage institutions with an insight into the various needs of the micro and small enterprises and their impact on the enterprises. 3. Micro and Small and Enterprises The findings will assist them on understanding how micromanage works, the costs incurred on micromanage and whether micromanage has an impact on them. 4. The Government The findings of this study will help the government understand the impact of micromanage on MESS and come with policies that will enhance the thriving of the accordance industry in the country.

TWO CHAPTER LITERATURE REVIEW 2. 1 Introduction This chapter will focus on the analysis of previous research and knowledge that has been gathered on this topic, and how this previous knowledge can give us an idea of what has been done and determines the knowledge gaps that our management research paper aims to fill. Thus this literature review will help provide vital information that will aid in determining the impact of micromanage on financial empowerment of micro and small enterprises.

Our literature review will be arranged according to the objectives of the paper and variables. It has been known that micro and small enterprises have been a driver of economic growth and improvement of standards of living, and the literature on this topic is far and wide thus according to Bennett (1994) and Ledger wood (1999) Miff can offer their clients who are mostly below or slightly above the poverty line a variety of products and services.

Numerous studies have been done on micromanage to assess its impact to those that use it, ranging from the financial to the social and through theses studies’ analysis we will be able to analyze the deduced impact both theoretical and empirical and use this to ampere with the findings of this study and establish the variations and/or similarities between our management research paper’s findings and what literature says, and also be instrumental in filling up the knowledge gap on the topic in Kenya.

Micromanage is seen worldwide as a key development tool, and despite some challenges that arise within the industry, it continues to grow in sub-Sahara Africa. In this literature review we systematically reviewed the evidence of the impacts of micro-credit and micro-savings on poor people in sub-Sahara Africa.

We considered impacts on income, savings, expenditure, and the accumulation of assets by the small and micro enterprises, as well as non-financial outcomes including health, nutrition, food security, education, child labor, women’s empowerment, housing, Job creation, and social cohesion in society and how these contribute positively to the growth, development and sustainability of micro and small enterprises.

World wide micromanage has receive praise for its positive impact on Seems and poverty eradication, micromanage has been credited with improving other financial outcomes including savings and the accumulation of assets such as furniture or a sewing machine), as well as non-financial outcomes such as health, food-security, nutrition, education, women’s empowerment, housing, Job creation, and social cohesion this is according to C. Van Rooney, et al. (2012) The Impact of Micromanage in Sub-Sahara Africa: A Systematic Review of the Evidence.

In Kenya, the ROAR increased with each consecutive loan showing that micromanage services enhance financial performance of Seems according to Maybug Mary Wanting, (2010) Impact of Micromanage Services on Financial Performance of Small and Micro Enterprises in Kenya. This showed that with the ability of Seems to access this micromanage services the chances of success and a positive impact on financial services was high, the potential of using institutional credit and other financial services for poverty eradication through micro and small enterprise start ups was quite significant.

Maybug Mary Wanting (2010) Impact of Micromanage Services on Financial Performance of Small and Micro Enterprises in Kenya. Kennedy, N. (2010) Impact of micro financing on performance of small and medium enterprises (seems’) in Sums central business district shows hat Miff operating as banking institutions, CACAOS and Kenya Post Office Saving Bank are already regulated by the act of parliament that specifies their different supervisory authority 2. 2. Realities of micromanage apart from subsidies the poor need access to credit and thus absence of formal employment make them non ‘ bankable. However a small barrier to the rapid development and growth of micro and small enterprises has been the ease of access to finance where in Kenya most of these small start ups will be or may be unable to qualify for these services and hence accessing finance has been identified as a key element for Seems to succeed in their drive to build productive capacity, to compete, to create Jobs and to contribute to poverty alleviation in developing countries.

Small business especially in Africa can rarely meet the conditions set by financial institutions, which see Seems as a risk because of poor guarantees and lack of information about their ability to repay loans.

Without finance, Seems cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger rims (UNCLAD, 2002) and thus Just showing how pivotal micromanage is to the growth, development and sustainability of micro and small businesses in Kenya and seemed to have a hard time accessing financial services, these are lack of security or collateral that then denies them access to credit, according to Cork and Nixon (2000), poor management and accounting practices are hampering the ability of smaller enterprises to raise finance.

This is coupled with the fact that small businesses are mostly owned by individuals whose personal lifestyle may have far reaching effects on the operations and sustainability of such businesses. As a consequence of the ownership structure, some of these businesses are unstable and may not guarantee returns in the long run. According to Kauffmann (2005), access to formal finance is poor because of the high risk of default among Seems and due to inadequate financial facilities. However, Cress and Alfonse (1997) sum up constraints facing Seems into two; these include demand-based (Seems) and supply-based (formal banks) financial constraints.

The duo define a supply-side finance constraint as a capital market imperfection that leads to a socially incorrect supply of funds to projects, or the incorrect interest rate charged on funds. They further define a demand-side financial constraint as a capital market imperfection in which performance of a firm is adversely affected by a factor internal to the firm. Thus for example, if the firm’s owners would like to grow the firm faster, but the only way they can do this is to relinquish equity, and they refuse to do so, it may be said that the firm’s demand for funds is demand-constrained.

The provision of “micro” financial services to the poor (those earning less than $2/day), in particular small loans of $50-$1000, has been hailed by advocates as an effective poverty alleviation and development tool (GAP, 003, Robinson, 2001 and Yuan’s, 1999). In a study done by C. Van Rooney, et al. (2012) The Impact of Micromanage in Sub-Sahara Africa: A Systematic Review of the Evidence. Found that micromanage had a significant effect on the financial status micro and small enterprises. Although they raised some questions on the effectiveness of micromanage, these questions will be addressed later in the review.

The findings of this study are presented in below. The study did a systematic review of the previous research on the topic of the impact of micromanage analysis the evidence of this impact. The findings on the impact of micro-credit and micro-savings on income, savings levels, expenditure and accumulation of assets were as follows. In analysis of the impact of micro-credit, evidence from research done by Deja et al. (2010) showed that credit with business management training and client welfare scheme had a positive impact on individual savings and also a positive impact on accumulation of assets by households.

It was found in a research by Ashram et al. (2008) that micro-credit with an orientation course had a positive impact on income for businesses. In a study by Barnes Gogh, et al. (2001) evidence was found of micro- reedit with business management training had a positive impact on income and on the accumulation of business level assets. Grubber and Rubbed. (2005) found evidence of positive impact for business income. Locale Cauldron, et al. (2008) found that micro-credit under the micromanage model of group based lending had a positive impact on household accumulation of assets.

Manor (2008) found that micro- credit offered with financial literacy training had a positive impact for household and business income. In determining the impact of combined micro-credit and micro- savings analysis off research done by Barnes, Agile et al. 2001) found evidence that family planning, Widths prevention and business management had a positive impact on individual savings and accumulation of assets. However the studies that have been done on the impact of micromanage on Seems have not always resulted in showing positive effects, and has thus raised some serious questions on the positive impacts of micromanage .

Various studies have shown much more mixed impacts such as its benefits to the poor but not the poorest, as seen in studies done by Cooperates, et al. (2001) and Helm ; Moslem. (1996) or that its much more important to alp the poor to better manage the money they have . Rutherford, (1996) up. 2. But not directly or sufficiently increasing income, empowering women, or that money spent on micro financing could be better used more effectively for other interventions as suggested by Ukrainian. 2007) or that a single intervention (such as micromanage) is much less effective as an anti-poverty resource than simultaneous efforts that combine micromanage, health, education, etc. (Lipton, 1996). Others allude to negative impacts , that micromanage does harm Just as it may do good, such as the exploitation of women, increased or at best unchanged poverty bevels, increased income inequality, increased workloads and child labor, the creation of dependencies and barriers to sustainable local economic and social development s put forward by Adams and Von Picked. 1992) , Bateman and Change. (2009) Micromanage is increasingly questioned not only due to the inability to clearly assess its positive impact, but also on its ideological terms, and thus with the recent crisis in the micromanage industry in India, Bosnia, Morocco, Pakistan, Nicaragua, and Nigeria where thousands are over-indebted with serious implications for people’s livelihoods ND communities, also increased the concerns.

Further when we review the available literature and examine the industry we see the increase in the centralization of the industry has been met with suspicion and concerns around the ethics of making money from the poor, and talk of “mission drift”, even within the micromanage industry, especially in India the case for greater regulation has been voiced clearer and louder as businesses have failed and suicide rates risen.

In a recent CNN publication titled “Experts warn Africa must learn from Indian’s micromanage robbers” it was highlighted that more borrowers were getting trapped in a debt cycle as most of them cannot be able to pay the high interest rates that sometimes go as high as 30% and this also supports or add to the question of ideology and intention of micromanage.

In the same publication it was argued, that micromanage has the potential for good and harm and researchers from the University of Loon’s Institute of Education (I.E.) and the University of Johannesburg found that some micromanage projects have the potential to boost the quality of borrowers’ lives by increasing incomes and improving food security as well as access to health and housing. However one may ask why do some of the negative effects occur?

According to the study, this happens because these high-risk borrowers often need to use the money for day-to-day consumption, instead of investing in their futures. In other cases, their “businesses fail to produce enough profit to pay high interest rates. ” Ruth Stewart. (2010) in a study focused on the impact of micromanage in sub-Sahara Africa, says that because the repayment of loans usually has to start very