CHAPTER ONE INTRODUCTION TO THE STUDY 1.

0 Overview This research study will focus on the factors influencing the shifting of customers from microfinance institutions to other financial institutions and will be a case study of Capital Sacco Limited Meru. 1.1 Backgroun !o "!u # According to Mortis (2000 ! microfinance lending institutions are recogni"ed and ac#nowledged as $ital and significant contributors to economic de$elopment. %ence! they ha$e been gi$en great emphasis in the recent past because they are considered as essential actors in achie$ing social and economic de$elopment in both de$eloped and de$eloping countries. &enya which has an estimated population of '0 million people and per capita income of (S ) 2*0 is categori"ed by the +orld ,an# to be among the poorest countries in the world (+orld de$elopment report -..2 . /ne of the main challenges facing &enya0s de$elopment agenda remains in finding a sustainable po$erty eradication strategy. As a result! Micro and small enterprises ha$e been identified and seen as one of the strategy that can bring faster de$elopment. Lending institutions therefore! play a big role in financing the micro and small enterprises for faster de$elopment. Microfinance institutions are also highly rated for employment creation and are therefore important in &enya where unemployment and under employment are estimated at between 212 and 312 respecti$ely. 4uring the period preceding the 5irst +orld +ar most economics of the world were product dri$en. %owe$er! as the 20th Century progressed! customers became sophisticated and demanding! ma#ing the manufacturers be more accountable of customer re6uirements (,ritish Council! 2002 . These changes brought about the growth of mar#et research and sur$eys! which were conducted to capture the needs of customers! hence! companies became mar#et7dri$en. 8owadays howe$er! companies ha$e become more customer dri$en and must therefore e9amine the needs and e9pectations of the indi$idual customer with the aim of producing their products:ser$ices accordingly. +ith an e$er more competiti$e future! fle9ibility! adaptability and
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customer oriented approach are $ital to an organi"ation0s sur$i$al. The future is customer7dri$en since without customers! the business does not e9ist! there will be no ;obs and no salaries (,ritish Council! 2002 . (nsatisfied customers will always shift to other organi"ations offering similar ser$ices. Customers now ha$e a wide choice of product and ser$ice pro$iders to choose from and satisfaction by one pro$ider will bring repeat purchase. %owe$er! dissatisfaction will not only cause the customer to mo$e to another pro$ider! but will mo$e along with other customers. This calls for good 6uality customer ser$ice that will offer customer satisfaction. According to <ichard =erson (-..' ! customer satisfaction is achie$ed when a customer0s e9pectation has been met or surpassed. According to >hilip &otler (Millennium edition ! the #ey to customer retention is customer satisfaction. ?ffecti$e and efficient customer ser$ice is crucial not only for immediate sales but also for long7term customer retention : loyalty which results to sustained growth in mar#et share and profits. @t is important for organi"ations therefore! to address issues relating to customer ser$ice because good customer ser$ices bring loyalty hence retention of customers. 1.$ S!a!e%en! o& !'e (ro)*e% There are se$eral factors that are currently affecting the operations of microfinance institutions in &enya! especially Capital Sacco Limited! the main ones being! high rates of inflation and corruption practices. There ha$e been fre6uent complaints by customers annually about insufficient funds! loan lending policies! high interest rates! and short repayment period. This has been attributed to the reasons leading to shift of customers to competitors in ser$ice organi"ations in &enya. The main problem at Capital Sacco Limited is that all loan applicants are gi$en a choice of repaying loans within a gi$en period of time which has been short. Additionally! late payments by any borrower results in suspension of further loans to the group. %igh or unpredictable inflation rates are regarded as harmful to lending institutions. They add inefficiencies in the performance of lending institution! and ma#e it difficult for lending institutions to budget or plan long7term programs. @nflation can act as a drag on performance of lending institutions because
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they will be forced to shift resources away from products and ser$ices in order to focus on profit and losses from currency inflation. (ncertainty about the future $alue for money discourages in$estment and sa$ings! and inflation can impose hidden ta9 increases! as inflated earnings push ta9payers into higher income ta9 rates. +ith high inflation! financial institution0s lending rates! lending capacity:policy and loan repayments and interest rates are ad$ersely affected. +here fi9ed e9change rates are imposed! rising inflation in one economy will cause its e9ports to become more e9pensi$e and affect the balance of trade. There can also be negati$e impacts to trade from an increased instability in currency e9change prices caused by unpredictable inflation. The wide use of @nternet as a way of sending and recei$ing money through M7>esa! Airtel Money and /range money has challenged Capital Sacco Limited mar#et share. Most people are using M7>esa! Airtel money and /range money which is 6uite affordable and a $ery fast way of doing business and personal transactions. The money transfer ser$ices are 6uite con$enient and accessible. This study will establish the factors contributing the shift of customers to other financial institution in the ,an#ing @ndustry! a case study of Capital Sacco Limited Meru. 1.+ O),ec!ive" o& !'e "!u # 1.+.1 -enera* O),ec!ive The main aim of the study will be to e$aluate the factors influencing the shifting of customers from microfinance institutions to other financial institutions 1.+.$ S(eci&ic O),ec!ive" i. ii. iii. To in$estigate how the loan lending capacity of Capital Sacco Limited contributes to shift of customers to other financial institutions. To identify how lending:credit policy adopted by Capital Sacco Limited contributes to shift of customers to other financial institutions. To determine how loan repayment period in Capital Sacco Limited contributes to shift of customers to other financial institutions.
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i$.

To e$aluate how interest rates of Capital Sacco Limited contributes to shift of customers to other financial institutions.

1.. Re"earc' /ue"!ion" The study will see# to answer the following research 6uestionsA i. ii. iii. i$. To what e9tent does the loan lending capacity adopted by Capital Sacco contribute to the customers0 shift to other financial institutionsB +hat is the effect of loan lending:credit policy formulated by Capital Sacco on the customers0 shift to other financial institutionsB To what e9tent does the loan repayment period adopted by Capital Sacco contribute to customers0 shift to other financial institutionsB +hat is the effect of interest rates charged on loans by Capital Sacco on the customers0 shift to other financial institutionsB

1.0 Signi&icance o& !'e "!u # This study will be of benefit to the lending institutions in that it will guide them in policy formulation! policies that will guide the organi"ation in day to day management of operations. @t is for this reason that microfinance institutions will be able to come up with mission and $ision which direct employees and management achie$ement of common goal to success. The study will also benefit the &enyan go$ernment in identifying the problems facing these lending institutions with a $iew to pro$iding solutions which may include donations! grants and subsidies meant for the welfare of the management of financial lending institutions in &enya. To the small scale entrepreneurs in different sectors of the economy! the study will benefit them since they will be more informed on how lending and microfinance institutions are managed! and also how these institutions can pro$ide short term loans to boost their business. 1.1 2i%i!a!ion" o& !'e "!u # The limitations of the study may include the followingA Challenges of literature re$iew may crop up especially if the materials will not be a$ailable. The researcher will then collaborate with the microfinance and e$en the super$isor on ways to get the literature re$iew. The respondents may be suspicious as to why the research will be conducted and this may lead to a slow response rate.
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To remo$e the suspicion! the researcher will e9plain and con$ince them that it will be for academic purposes only. The respondents may not ha$e enough time to answer all the 6uestions or they may not understand the 6uestions. The researcher will re6uest them to sacrifice their time and also get someone to e9plain the 6uestions to them. The researcher also may ha$e limited time to carry out the research due to other commitments such as wor#. 1.3 Sco(e o& !'e "!u # The study will be conducted at Capital Sacco Limited head office in Meru town and two of its branches. The target population for this study will be the Top management! middle le$el management and employees at Capital Sacco Limited offices represented by 1! -0 and -1 respecti$ely. The category of respondents targeted will be 30 respondents who will be pic#ed from the three main strata as abo$e. The research shall be carried out within a si9 months period! with the main aim of finding out the main factors contributing to the shift of customers to other financial institutions in &enya! a case study of Capital Sacco Limited in &enya.

CHAPTER T4O 2ITERATURE RE5IE4 $.1 In!ro uc!ion The chapter focused on gi$ing in7depth $iew on what other writers ha$e said thus enabling the researcher to de$elop the foundation and bac#ground of the study about factors that influence shift of customers from microfinance institutions to other financial institutions. The chapter will hence discuss causes of customer dissatisfaction in an organi"ation0s ser$ices that could cause them to see# for similar products and ser$ices from competitors. $.$ Review o& (a"! *i!era!ure $.$.1 2en ing ca(aci!# Lending capacity is the amount on reser$e! for members to apply. This is influenced by inflation rates that are mainly caused by sudden rise in prices of other items but mainly household commodities in the mar#et. This has a multiplier effect on the money lending institutions lending capacity! in that most loan applicants will apply for huge sums of money! to spend on their daily needs due to high prices of basic goods. ,ut the fi9ed cost of processing loans of any si"e is considerable! assessment of potential borrowers! their repayment prospects and security administration of outstanding loans! collected from delin6uent borrowers and so on. <ansom (-..C There is a brea#e$en point in pro$iding loans or deposits below which ban#s lose money on each transaction they ma#e. Low income earners usually fall below the brea#e$en point. @n addition! most Customers ha$e few assets that can be secured by the institution as collateral. As documented e9tensi$ely by the management! e$en if they happen to own land! they may not ha$e effecti$e title deeds for the property. This means that the institution will ha$e little resource against defaulting borrowers from the institutions. Adams (-.*0 5rom a broader perspecti$e! it has long been accepted that the de$elopment of a healthy national financial system is an important goal and catalyst for the broader goal of national economic de$elopment. %owe$er! the efforts of national planners and e9perts to de$elop financial ser$ices for their nations0 ma;orities ha$e often failed since +orld +ar @@! due to high inflation rates!
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leading to financial institutions failing to ha$e sufficient funds for their members. Adams (-.*0 ! in their classic analysis D(ndermining <ural 4e$elopment with Cheap Credit0 <ansom (-..C ! uses the simplest dynamic model to bring out this idea whereby the lending capacity is controlled by the Central ban# that determine how much reser$e rates should a money lending institution maintain and has an impact on the lending capacity. The lending capacity is thus a weighted a$erage of the short E and long E run in$erse as set and standardi"ed by the Central ban# of &enya. @t follows that! as the long7run (direct supply of money to financial institutions tends to be much higher than the short7run one! this $ery simple dynamic model predicts the need to regulate the amount of finances to be loaned to 5inancial institutions #eeping in mind the rate of inflation has ad$erse effects! due to the distorted signals they send to the mar#et. Artificially high rates of interest charged by central ban# discourage future shortages in money a$ailable for the customers to borrow. Temporary controls may complement a recession as a way to fight inflation. %owe$er! in general the ad$ice of economists is not to impose lending capacity rates controls! but to liberali"e it by assuming that the economy will ad;ust and abandon unprofitable economic acti$ity. $.$.$ 2en ing6Cre i! (o*ic# A policy is typically described as a principle or rule to guide decision and achie$e rational outcome. >olicy refers to the process of ma#ing important organi"ational decisions including the identification of different alternati$es such as programs or spending priorities and choosing among them on the basis of impact they would ha$e. >olicies can be understood as political! management! financial and administrati$e mechanisms arranged to reach e9plicit goals. A lending policy is a statement of philosophy! standards! procedures and guidelines that employees must obser$e in granting or re;ecting a loan re6uest. These policies determine which members of the industry or business will be appro$ed for loans and which will be re;ected and must be based on the central ban# rele$ant laws and regulations. Manual policy document (20-0 publication. @n addition a lending policy whether stringent or liberal is composed of lending terms which are the methods used to analy"e credit re6uests and used in decision ma#ing. Lending terms are therefore are a combination of credit conditions and standards of ad$ancing credit. <eco$ery
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includes all efforts of collecting loan balances in arrears to maintain a profitable loan portfolio (Ale9is! 20-0 . Lending policy is the primary means by which senior management and the ,oard of an institution guides the lending acti$ities. @t therefore pro$ides the scope for achie$ing the loan portfolio 6uality and returns! guides the ris# tolerance le$els in a manner commensurate with the institutions strategic direction! ,oah (20-0 . Lending policy enables an M5@ to limit bad debts and impro$e cash flows since loans are in most cases the core business acti$ities in M5@s. The credit policy also assures a degree of consistency among departments by writing down what is e9pected of each department as well as ensuring consistence in handling customers based on pre determined parameters. <iach (20-0 According to <u#waro (200- ! the lending policy must thus either be efficient that is able to assess loan applicants0 characteristics than e9pected profit ma9imi"ation. The lending policy has to ta#e into consideration the $alue at ris#! being a $alue weighted sum of indi$idual ris#s! pro$ides a more ade6uate measure of monetary losses on a portfolio of loans than default ris#. Capital Sacco Limited deri$es a $alue at <is# measure for the sample portfolio of loans and shows how analy"ing this can enable money lending institutions to e$aluate alternati$e lending policies on the basis of their implied credit ris# and loss rate! inflation and ma#e lending rates consistent with the implied Falue at <is#. Lending:Credit policies $ary from institution to institution and are always supplemented to by more detailed guidelines and procedures. The $ariations arise due mar#et conditions! geographical locations! personnel and portfolio ob;ecti$es but under all circumstances credit policies tally with the lending acti$ities. Lending:Credit policies $ary from institution to institution and are always supplemented to by more detailed guidelines and procedures. The $ariations arise due mar#et conditions! geographical locations! personnel and portfolio ob;ecti$es but under all circumstances credit policies tally with the lending acti$ities. 8a$an;as (200. @n addition a credit policy specifies the authori"ation procedures for credit decisions 5ar6uhar (20-0 . This can be illustrated where M5@s Management gi$e ,ranch managers0 authority to
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appro$e loans depending on the limits and ris#s associated with gi$en credit applicant (5@8CA! 20-0 . Loans e9ceeding ,ranch limits are forwarded to senior management usually at regional le$els and head office hence influencing outreach. Lending:Credit policies are periodically re$iewed and re$ised by management to incorporate changes in strategic direction and ris# tolerance or mar#et conditions (?lliot! 200. . >olicies are re$ised to incorporate customer preferences so that they are ser$ed according to their e9pectations. M5@s re$iew credit policies on a$erage after three years (Credit manual! 200. . The re$iews are used to e$aluate the performance of the policy in terms of achie$ing desired ob;ecti$es ranging from profitability to customer growth and outreach. $.$.+ 2oan re(a#%en! Loan repayment is an agreement period by which an owner of property (the lender allows the other party (the borrower to use property or funds for a specific time period! and in return the borrower will pay the lender a payment (usually interest ! and return the property (usually cash at the end of the period. A loan is usually e$idenced by a promissory note. ?9amples are commercial! consumer! mortgage and auto loans. The capability of borrowers to repay their microcredit loans is an important issue that needs attention. ,orrowers can either repay their loan or choose to default. ,orrower defaults may be $oluntary or in$oluntary (,rehanu G 5ufa! 200H . According to ,rehanu and 5ufa (200H ! in$oluntary defaults of borrowed funds could be caused by une9pected circumstances occurring in the borrower0s business that affect their ability to repay the loan. (ne9pected circumstances include lower business re$enue generated! natural disasters and borrowers0 illness. @n contrast! $oluntary default is related to morally ha"ardous beha$iour by the borrower. @n this category! the borrower has the ability to repay the borrowed funds but refuses to because of the low le$el of enforcement mechanisms used by the institution (,rehanu G 5ufa! 200H . <esearch has shown that a group lending mechanism is effecti$e in reducing borrower defaults (Armendari" de Aghion! -... . @n group lending! the loan is secured by the co7signature of members within the group and not by the microfinance institution. ?ach member will put pressure on the others in the

group to meet the loan repayment schedule. Thus! group sanction is important in discouraging defaults among members in microfinance (Fan Tassel! -... . According to <osenberg (-... ! Micro 5inance @nstitutions (M5@s are increasingly a central source of credit for the poor in many countries. +ee#ly collection of repayment installments by ban# personnel is one of the #ey features of micro7finance that is belie$ed to reduce default ris# in the absence of collateral and ma#e lending to the poor $iable. Some of the factors that lead to loan default includeI inade6uate or non7monitoring of micro and small enterprises by ban#s! leading to defaults! delays by ban#s in processing and disbursement of loans! di$ersion of funds! o$er7concentration of decision ma#ing! where all loans are re6uired by some ban#s to be sanctioned by Area:%ead /ffices. The typical repayment schedule offered by an M5@ consists of wee#ly repayment starting one to two wee#s after loan disbursement. +ee#ly collection of repayment installments by ban# personnel is one of the #ey features of micro7finance that is belie$ed to reduce default ris# in the absence of collateral and ma#e lending to the poor $iable 7 Fogelgesang (2003 . @n addition! fre6uent meetings with a loan officer may impro$e client trust in loan officers and their willingness to stay on trac# with repayments. $.$.. In!ere"! ra!e" According to Saleemi (200. ! interest is earnings on loans charged on loanees or members. The ma;or determinants of interest rate are the demand and supply for money in circulation. 5inance lending institutions 6ualify to gi$e loans to applicants who ha$e met the rele$ant re6uirements! on some occasions loanees default. This study will in$estigate how interest rates charged by micro7finance institutions affect their operations and performance. /yando (20-0 pointed out that customers who loo# to micro7finance institutions for money or rather funding! are paying through the nose in terms of interest rates as these Money Lending @nstitutions see#s to limit their le$el of e9posure.

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Many countries ha$e established interest rate ceilings to protect consumers from unscrupulous lenders. =o$ernments often also face political or cultural pressure to #eep interest rates low. 4espite good intentions! interest rate ceilings generally hurt the poor by ma#ing it hard for new microfinance institutions (M5@s to emerge and e9isting ones to stay in business. @n countries with interest rate caps! M5@s often withdraw from the mar#et! grow more slowly! become less transparent about total loan costs! and:or reduce their wor# in rural and other costly mar#ets. ,y forcing pro7poor financial institutions out of business! interest rate caps often dri$e clients bac# to the e9pensi$e informal mar#et where they ha$e no or little protection. ,rigit and Ja$ier (200' The process of fi9ing the usury rate was often 6uestioned and propositions of impro$ement sometimes suggested (,audassK and La$igne! 2000 . @n de$eloping countries! the ris# of a bad legislation cannot be dismissed. The inade6uate legislations reduce transactions and efficient functioning of mar#ets (Coet"ee and =oldblatt! -..H . That is true for the financial legislations and in particular for the microfinance sector in Africa! which is dominated by the informal practices. The cost of an inappropriate legislation could be socially high in this conte9t where the products of sa$ing are not $ery di$ersified The fi9ation of different thresholds of usury for ban#s and microfinance institutions supports the idea that the credit charge and the ris#s ta#en in microfinance are different from those of ban#s. @t is not only a 6uestion of guaranteeing the efficiency of the microfinance mar#et but also to set up a protection against high interest rates. +e find this idea from the scholasticism for whom! little lenders could become a powerful oligopoly which fi9es high interest rates allowing an o$ere9ploitation of the borrowers in case of insufficient competition (,audassK and La$igne! 2000 . This idea of protection appears also with =laeser and Schein#man (-..H for whom! an usury law which restricts the le$el of interest rates plays a role of social insurance by imposing a transfer of income from the lenders to the borrowers because marginal utility of capital is stronger with the laters than the firsts who are in a situation of abundance. ,ut for Adam Smith! setting up a threshold of usury helps sol$ing problems of anti7selection! the lenders will probably being attracted by high interest rates offered by ad$enturers at all do not worried about a fund repayment (,audassK and La$igne! 2000I 4iat#ine! 2002 .
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/n the other hand! the argument of efficiency in fa$our of an interest rate ceiling is that the lenders face a legal ceiling will try to minimi"e the costs of credit to ma9imi"e their profit margin. The liberal economists thin# that imposing a threshold of usury reduces the possibility of reaching >aretoLs optimum where lender and borrowers can not any more! one andMor the other one! under certain conditions! impro$e their satisfaction. The suspension of loan beyond the usury interest rate reduces not only the satisfaction of the lender but also that of the borrower who was ready to pay this price but sees itself speechless of an usury loan! without as far as one other loan at better rate is offered to him (,audassK and La$igne! op. cit. . $.+ Cri!ica* *i!era!ure review =enerally! the main factors contributing to the shift of customers to competitors in ser$ice organi"ations! a case study of Capital Sacco Limited are the Central ,an# of &enya lending Capacity to microfinance institutions! the Capital Sacco Limited lending policies! the loan repayment period and the interest rates charged on loans. There is need for technical support to transforming institutions and to those who wish to de$elop sa$ings ser$ices! and support to the process of identifying and securing e6uity in$estors. This will lead to customer retention and organi"ations prosperity. As more money lending institutions programs cross the hurdles of operational efficiency and then full profitability! with strategically applied e9ternal support! they can begin to reach tens of millions of low income families with high 6uality financial ser$ices. @n so doing they help those families lead more secure! empowered! and healthy li$es and to pro$ide children with better economic opportunities. ?nlarging opportunities is the ultimate purpose of micro enterprise finance. @t is generally accepted that credit! which is put to producti$e use! results in good returns. ,ut credit pro$ision is such a ris#y business that! in addition to other reasons of $aried nature! it may in$ol$e fraudulent and opportunistic beha$ior. M5@s should rather depend on loan reco$ery to ha$e a sustainable financial position in this regard! so that they can meet their ob;ecti$e of alle$iating po$erty. +hether default is random and influenced by erratic beha$ior or whether it is influenced by certain factors in a specific situation! therefore! needs an empirical

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in$estigation so that the findings can be used by micro financing institutions to manipulate their credit programs for the better (,u$inic! -..C . @n a case study by /pportunity @nternational! high or hyperinflation economic conditions se$erely reduced the ability of microenterprises to repay loans. @n the study the e9perience of two different microfinance institutions was analy"ed. @n both cases! the loans to clients were inde9ed to the (.S. dollar and as the countries e9perienced high inflation and the resulting de$aluation of their currencies! most clients were unable to ma#e complete payments. This case study shows! not surprisingly! that macroeconomic conditions affect the ris#s in the portfolio. The abo$e re$iew suggests that the le$el of ris# in an M5@0s loan portfolio is influenced by the choice of lending methodologies! borrowers0 gender! other (microeconomic institutional factors! and macroeconomic $ariables that affect the ability of the borrower to repay loans! +eele and Mar#owich (200-

The role of collateral and guarantees in lending relationship has been widely discussed! and different conclusions ha$e been reached. (nder perfect information! the ban# can distinguish between different types of borrowers! has perfect #nowledge about the ris#iness of their in$estment pro;ects! therefore there is no need for guarantees. (nder asymmetric information! howe$er! collateral and personal guarantees play a role in sol$ing different problems that may arise (/no and (esugi! 200* . @n a principal7agent setting! Nohn et al. (2003 find that guarantees decrease the ris#iness of a gi$en loan! and that collaterali"ed debt has higher yield than general debt! after controlling for credit rationing. Ahamed (20-0 describes a credit policy as a management philosophy spelling out the decision $ariables of credit standards! credit terms and collection efforts by which managers in M5@s ha$e an influence on their operations. The credit policy impacts on the outreach of M5@s depending on the lending approaches used to screen clients for credit facilities which are either liberal or stringent in nature. These approaches are effecti$e pro$ided managers are competent with the rele$ant s#ills! #nowledge and e9perience of leading teams to achie$e targets set (5rey! 20-0 . A credit policy adopted impacts on the outreach and customer retention in M5@s. %owe$er! the research under loo#ed the impact of managerial competence while implementing the credit
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policy as fundamental to achie$e lending goals! Oeller G Lapen (200. . Micro finance lending is associated with default ris# which compels management to formulate and implement credit policies which are used by managers to influence credit accessibility inform of outreach. /nce credit is accessed by customers! manager play a big role with staff in retaining customers which is achie$ed on the assumption that managers are competent enough to ma#e financial decisions which facilitates the achie$ement of corporate ob;ecti$es (Tamil! 200. . Managerial competence is the ability of managers to direct wor# streams and define outcomes clearly while leading staff as a team (Nay! 20-0 . The capability of borrowers to repay their microcredit loans is an important issue that needs attention. ,orrowers can either repay their loan or choose to default. ,orrower defaults may be $oluntary or in$oluntary (,rehanu G 5ufa! 200H . According to ,rehanu and 5ufa (200H ! in$oluntary defaults of borrowed funds could be caused by une9pected circumstances occurring in the borrower0s business that affect their ability to repay the loan. (ne9pected circumstances include lower business re$enue generated! natural disasters and borrowers0 illness. @n contrast! $oluntary default is related to morally ha"ardous beha$ior by the borrower. @n this category! the borrower has the ability to repay the borrowed funds but refuses to because of the low le$el of enforcement mechanisms used by the institution (,rehanu G 5ufa! 200H . <esearch has shown that a group lending mechanism is effecti$e in reducing borrower defaults (Armendari" de Aghion! -... . @n group lending! the loan is secured by the co7signature of members within the group and not by the microfinance institution. ?ach member will put pressure on the others in the group to meet the loan repayment schedule. Thus! group sanction is important in discouraging defaults among members in microfinance (Fan Tassel! -... . $.. Su%%ar# an ga( !o )e &i**e )# !'e "!u # There ha$e been attempts in the past to study Micro financing and Micro lending but much focus has been on the impact of M5@s in po$erty alle$iation! especially in &enya. 8ot much has been done to find out impact of lending policy! lending:credit policy! interest rates and loan repayment period on customers0 loyalty and reasons for shifting to other M5@s institutions in Meru County! therefore this research addresses that gap.

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Summarise what u have reviewed showing the gap you are saying

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$.. Conce(!ua* 7ra%ework 7igure $.1 Conce(!ua* 7ra%e work In e(en en! varia)*e"
Lending capacity

De(en en! 5aria)*e

Lending policy

Affects
Loan <epayment

Customers shifting to Competitors

@nterest <ates

Source Au!'or 8$01+9 E:(*ana!ion o& varia)*e" $...1 2en ing Ca(aci!# This is the ability to gi$e out loans to applicants! in relation to the repayment period and applicants0 security or guaranteed arrangement. 5rom the lending institution point of $iew! this terminology is used to categori"e different institutions as per the members0 discretion to get loans! or funds a$ailable to members! which may ha$e been pooled together through monthly contribution to the pool. This study will find out how lending capacity affects the performance of Capital Sacco Limited. $...$ 2en ing Po*ic# A policy is a statement that is formulated by the management of an organi"ation! to guide its employees or customers on the day to day organi"ational : operational acti$ities. Lending institutions lending policy statements outline to the customers rules and regulations for applying
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for loans from the institution. This study will loo# at how lending policy adopted by Capital Sacco Limited affects its performance. $...+ In!ere"! ra!e" @nterest is earnings on loans charged on loanees or customers. The ma;or determinants of interest rate are the demand and supply for money in circulation. 5inance lending institution 6ualifies to gi$e loans to applicants who ha$e met the rele$ant re6uirements! on some occasions loanees default. This study will in$estigate how interest rates charged by Capital Sacco Limited affected its operation and performance. $.... 2oan Re(a#%en! According to Capital Sacco Limited loan repayment is an agreement period within which Capital Sacco Limited allows the customer to use the funds (loans for a specific time period! and in return the borrower will pay interests and the principal amount ad$anced by Capital Sacco Limited at the end of the period. This is usually contained in a letter of offer (terms and conditions that the borrower signs before the funds are released by Capital Sacco Limited.

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RE7ERENCES Adam! S. (2000 Puantity of theories and Model! 1th ?dition Mc =rawl! >ublishers (& London Ahamed! <. (20-0 ! Microfinance institutions in de$eloping countries! Nournal of microfinance Ser$ices !Fol. . 8o. -! pp '. Ale9is! M. (20-0 ! ?nhancing outreach e9tensions in 5@8CA! @nternational ;ournal of credit policy Fol. 2! 8o *! pp--. Armendari"! ,! and Morduch! N. (2001 . QMicrofinanceA +here 4o we StandBR @n 5inancial 4e$elopment and ?conomic =rowthA ?9plaining the Lin#s! edited by C. =oodhart. ,asingsto#eA >algra$e Macmillan Armendari" de Aghion! ,. (-... . /n the design of a credit agreement with peer monitoring. Nournal of 4e$elopment ?conomics! *0(- ! C.7-0' ,oal (-..C ! Simplest @nflation Model theory! 2nd ?dition! >itman >ublisher! (& London ,oah! M (20-0 ! The use of credit policy amidst escalating defection rates !<esearch paper on Microfinance ,rehanu! A.! G 5ufa! ,. (200H . <epayment rate of loans from semi7formal financial institutions among small7scale farmers in ?thiopiaA Two7limit Tobit analysia. The Nournal of Socio7 ?conomics! 3C! 222-72230. ,rown C. (2000 ! Conflict Loan 5unds for Microfinance @nstitutionsA A Loo# at ?merging ?9perience! (@nc! ,ethesda >ublications pp. 3073' ,rigit %elms and Ja$ier <eille! The @mpact of @nterest <ate Ceilings on Microfinance! C=A> ,u$inic! M. (-..C . +omen in po$ertyA A new global underclass. 5oreign >olicy! -0H! 3H713. 5ocus 8ote (+ashington! 4CA C=A>! forthcoming 200' . Charles (200H Microfinance ,races for %ard times in post election Fiolence! (The African ?9ecuti$e Nournal pp -27-. March . C/?TO??! =. and S. =oldblatt! -..H! DD<egulation and Super$ision of Microfinance @nstitutionsA ?9periences from South Africa. >aper presented on the C=A>7Conference DDSa$ings in the Conte9t of Microfinance00. &ampala! (ganda! -07-3 5ebruary -..H. Credit manual 200. >ost ,an# credit manual.
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?lliot! F. (200. The role of customers in financial profitability. Nournal of management and ?ducation Fol. --! 8o -2 pp 2 5ar6uhar! O. (20-0 ! 5ramewor# for managerial competence! Limits! suggestions and problem! Nay J. (20-0 competent managers! %andboo# of ManagementA ?$ans publishing company Nournal of management Fol. - 8o ' pp 2 5@8CA credit manual 20-0 =laeser! ?. et Schein#man! N. (-..H DD8either a ,orrower nor a Lender beA An ?conomic Analysis of @nterest <estrictions <estriction and (sury Laws00! Nournal of Law and ?conomics! '- (- ! April >>. -73*. Nohn &.! Lynch A. +. and M. >uri (2003 ! QCredit <atings! Collateral and Loan CharacteristicsA @mplications for SieldR! Nournal of ,usiness! C*! 3C-7'0. &otler >. (-..C =rowth Management Analysis! >lanning and Control! (>rentice hall A 8ew 4elhi -2 ?dition pg --37--' Ledgerwood >. (-..3 !RCredit <ationing by M5@s and influence on the operation of MS?sR! (npublished M,A research pro;ect! ((ni$ersity of 8airobi Library 200Mudinda <. (200* Modern ?conomics! (>enguin >ublishers! 2nd ?dition pp 307'0 8ar$an;as! M.(200. ! ,a#ing on customer loyalty in ser$ice industries! Nournal of public relations Fol.-2 8o --!pp-. /no A. and @. (esugi (200* ! QThe <ole of Collateral and >ersonal =uarantees in <elationship LendingA ?$idence from Napan0s Small ,usiness Loan Mar#etR! mimeo /tero. (-..' The 8ew +orld of Micro7 enterprise 5inancial7,uilding %ealthy 5inancial @nstitutions for the poor! (&umarian >ress ! 8ation Media =roup >ublishers. /nyango S.( 200. 8ation 8ews paper ! 8ation Media =roup publishers (pp -3 7 -1 . <iach! M (20-0 ! Credit ris# management and policy implications for microfinance institutions! <esearch >aper <osenberg! <. (-... ! Measuring Microcredit 4elin6uencyA <atios Can ,e %armful to Sour %ealth!T occasional >aper 8o. 03! C=A>
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<u#waro C. (200- ! QCredit <ationing by M5@s and its influence on the operation of MS?s0 (npublished M,A pro;ect! ((ni$ersity of 8airobi! 200-! $ol.30 pp 1*7*0 Tamil! N. (20-0 ! customer retention in retail financial ser$ices! An employee perspecti$e !Fol. 2 8o - ppC. Fan Tassel! ?. (-... . =roup lending under asymmetric information Nournal of 4e$elopment ?conomics! *0! 3721. Fogelgesang (2003 A ;Microfinance in Times of CrisisA The ?ffect of Competition! <ising @ndebtedness! and ?conomic Crisis on <epayment ,eha$iorR +orld 4e$elopment.3+eele! &. F. and >. Mar#owich. 200-. QManaging %igh and %yper @nflation in MicrofinanceA
/pportunity @nternational0s ?9perience in ,ulgaria and <ussia.R (SA@4UMicroenterprise ,est >ractices (M,> >ro;ect! August

Oeller! A. G Lapen! 5. (20-0 ! ?nhancing microfinance performance amidst human capital Challenges! Nournal of microfinance! Fol.2 8o 2! pp -1720

NB REVISE CHAPTER TWO AND FEW CORRECTION IN CHAPTER ONE EG LIMITATION OF THE STUDY Revise references an reference If '#( can )e! a *e!!er aca e&ic an +r#fessi#na% !er& ra!"er !"an *e *e!!er , in en! i! as s"#$n !"e sec#n %ine fr#& eac"

customers shifting to other financial institution i! $#(% *(! '#( fai% !# )e! #ne '#( can c#n!in(e

Brin) c"a+!er !"ree $i!" revise c"a+!er #ne an two

#r c#rrec!e

-(es!i#nnaire an

20