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Assessment of Micro Financial Institution Funding on the
Performance of Small and Medium Enterprises in Muranga
County-Kenya

Mrs N*o+i Mwangi
1
Mr. ,dam S-isia
1( 2


.ilian Mwai
1( 2( $

/r 0alter Bi1-anga %+i2o
1(2( $( )

1. !-/ 1andidate( S1-ool of Business( 3aratina 4ni5ersit6( !.% Bo7 1958 1ode 10101 3aratina( 3en6a
E-Mail9n*o+indungu:6a-oo.1om
2. !-/ 1andidate( S1-ool of Business and E1onomi1s( Mount 3en6a 4ni5ersit6( !.% Bo7$)2 1ode 01000 ;-i+a(
3en6a
E-Mail9 1orresponding aut-or9 adams-isia:gmail.1om
$. !-/ 1andidate( S1-ool of Business and E1onomi1s( Mount 3en6a 4ni5ersit6( !.% Bo7$)2 1ode 01000 ;-i+a(
3en6a
E-Mail9 limwai19:6a-oo.1om
). S1-ool of Business and E1onomi1s( Mount 3en6a 4ni5ersit6( !.% Bo7$)2 1ode 01000 ;-i+a( 3en6a
E-Mail9 walter.o+i2o:6a-oo.1om

Abstract
;-e fundamental purpose of t-is stud6 was to assess t-e impa1t of Mi1ro finan1e Institutions M<Is" funding on
t-e performan1e of Small and Medium Enterprises SMEs" in rural Murang=a. Simple random sampling
te1-ni>ue was emplo6ed in sele1ting t-e 50 SMEs t-at 1onstituted t-e sample si?e of t-e resear1-. Stru1tured
>uestionnaire was designed to fa1ilitate t-e a1>uisition of rele5ant data w-i1- in5ol5es simple per1entage
grap-i1al 1-arts. Illustrations were ta1ti1all6 applied in data presentations and anal6sis. ;-e findings of t-e stud6
re5eal t-at elements i.e. te1-nolog6( management( training and finan1ing were 5er6 1ru1ial mu1- as M<Is
funding 2enefitted t-e SMEs e5en t-oug- onl6 few of t-em were 1apa2le enoug- to se1ure t-e loan amount
needed. Interestingl6( ma*orit6 of t-e SMEs a1+nowledged positi5e 1ontri2utions of M<I funding towards
promoting t-eir mar+et e71ellen1e and it is re1ommended t-at furt-er resear1- 2e 1arried out in ot-er industries
and 1ountries in order to s-ow w-et-er t-ere=s an6 lin+ 2etween M<I funding and performan1e on SMEs.
Keyords! Mi1rofinan1e( Mi1ro <inan1e Institutions( Small and Medium Enterprises

"# Ac$noledgement
<irst of all I would li+e to t-an+ @od almig-t6 w-o -as 2roug-t me t-is far. Ae -as pro5ided me wit- strengt-(
+nowledge and 5italit6 t-at ena2led me to ma+e t-is !ro*e1t a realit6.Se1ond( I wis- to t-an+ m6 famil6 more so
m6 1-ildren for t-eir moral support and en1ouragement and t-eir understanding w-en I was not t-ere for t-em
during t-e period I was wor+ing to 1ome up wit- t-is !ro*e1t. I wouldn=t -a5e made it t-is far wit-out t-em. M6
sin1ere gratitude also goes to m6 super5isor /r. Mar6 Namusonge( asso1iate super5isor /r. Jagongo and Mr
,nton6 /. Bo*ana for editing t-e final pro*e1t. I salute 6ou. .ast 2ut not least( l would li+e to a1+nowledge more
sin1erel6 m6 1o-aut-ors( espe1iall6 Mr. ,dam S-isia of Ma1-a+os 4ni5ersit6 Bollege w-o wor+ed tirelessl6 to
ensure t-is pu2li1ation is a su11ess.
"#" Introduction
Mi1rofinan1e -as se5eral 1ompeting definitions. <or instan1e( Mordu1-( 2000" defined mi1rofinan1e as t-e
pro5ision of finan1ial ser5i1es and loans to t-e poor in w-i1- a sum of mone6 loaned out is repaid in small
installments o5er a 1ertain period of time Mordu1-( 2000". Aowe5er( mi1rofinan1e is generall6 an um2rella
term t-at refers to t-e pro5ision of a 2road range of finan1ial ser5i1es su1- as deposits( loans( pa6ment ser5i1es(
mone6 transfers and insuran1e to poor and low-in1ome -ouse-olds and t-eir mi1ro-enterprises S-arma( 2001".
;-ese 2orrowers usuall6 la1+ 1redit -istories( 1ollateral( or 2ot-( and t-us( do not -a5e a11ess to finan1ing from
mainstream 1ommer1ial 2an+s Baner*ee and /uflo( 2008". <or t-is reason( M<Is are seen as pla6ing a role in
t-e 1reation of e1onomi1 opportunit6( and in po5ert6 alle5iation.
Mi1rofinan1e aims to 2ring finan1ial ser5i1e to poor people as to pro5ide small-s1ale finan1ial ser5i1es
primaril6 sa5ings( 1redit and insuran1e to people performing small or mi1ro 2usiness a1ti5ities su1- as farming(
fis-ing( -erding or mi1ro-enterprises produ1ing( re161ling( repairing or selling goods .alit-a( 200#".
Mi1rofinan1e emerged as a no2le su2stitute for informal 1redit and an effe1ti5e and powerful instrument for
po5ert6 redu1tion among people w-o are e1onomi1all6 a1ti5e 2ut finan1iall6 1onstrained and 5ulnera2le in
5arious 1ountries Japoni1a Interse1toral( 200$C Mordu1- D Aale6( 2002". It 1o5ers a 2road range of finan1ial
ser5i1es in1luding loans( deposits and pa6ment ser5i1es( and insuran1e to t-e poor and low-in1ome -ouse-olds
and t-eir mi1ro-enterprises.
1.1.2 History of Microfinance
Mi1rofinan1e dates 2a1+ w-en mone6 lenders were performing t-e role of formal finan1ial institutions. ;-e
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informal finan1ial institutions areC 5illage 2an+s( 1ooperati5e 1redit unions and so1ial 5enture 1apital funds t-at
pro5ide sa5ings and 1redit ser5i1es for SMEs. ;-e6 mo2ili?e rural sa5ings and -a5e simple pro1edures t-at
originate from lo1al 1ultures @ermidis et al.( 1991". ;-e6 fund SMEs in de5eloping 1ountries w-ere are more
li+el6 to fail Malone6( 200$".
Aistor6 of mi1ro finan1ing 1an 2e tra1ed to t-e middle of t-e 1#00s w-en t-eorist .6sander Spooner
was writing o5er t-e 2enefits from small 1redits to entrepreneurs and farmers of as a wa6 getting t-e people out
of po5ert6. %ne of t-e earliest mi1ro-1redit organi?ation pro5iding small loans to rural poor dwellers wit- no
1ollateral is t-e Iris- .oan <und s6stem initiated in t-e earl6 1800s 26 Jonat-an swift. Ais idea 2egan slowl6 in
1#)0s and 2e1ame a widespread institution of a2out $00 2ran1-es all o5er Ireland in less t-an one de1ade. ;-e
prin1ipal purpose was to ad5an1e small loans 2ased on some trust for s-ort periods. ;-e Iris- loan fund attra1ted
a2out 20 per 1ent of all Iris- SMEs leading to growt- of SMEs e5er6 6ear. In t-e 1#00s 5arious t6pes of longer
and more formal sa5ings and 1redit institutions 2egan to emerge +nown as people=s 2an+s 1redit unions and
sa5ings and 1redit 1ooperati5e. ;-e6 were moti5ated to assist t-e rural population to 2rea+ out of t-eir
dependen1e on mone6 lenders and impro5e t-eir welfare. <rom 1#80( t-e unions rapidl6 e7panded o5er a large
1ooperati5e mo5ement and >ui1+l6 spread to ot-er 1ountries in Europe and Nort- ,meri1a and e5entuall6
supported 26 t-e 1ooperati5e mo5ement in de5eloped 1ountries and donors and also to de5eloping 1ountries.
1.1.3 Types of Microfinance Institutions
,11ording to /a1-e5a 2010"( mi1rofinan1e ser5i1es are pro5ided 26 t-ree t6pes of sour1es9 formal institutions(
su1- as rural 2an+s and 1ooperati5esC semi-formal institutions( su1- as nongo5ernment organi?ationsC and
informal sour1es su1- as mone6 lenders and s-op+eepers. Institutional mi1ro-finan1e is defined to in1lude
mi1rofinan1e ser5i1es pro5ided 26 2ot- formal and semi-formal institutions. Mi1ro-finan1e institutions are
defined as institutions w-ose ma*or 2usiness is t-e pro5ision of mi1rofinan1e ser5i1es.
Eegarding formal mi1rofinan1e( we -a5e /e5elopment and Mi1rofinan1e Ban+s( Non-2an+ finan1ial institutions(
1ontra1tual sa5ings institutions !ension funds and insuran1e 1ompanies" and Bommer1ial Ban+s in t-e formal
se1tor. Multipurpose 1ooperati5es( 1ooperati5e >uasi-2an+s( emplo6ee sa5ings funds( &illage 2an+s(
de5elopment pro*e1ts( and 1redit unions( w-i1- are owned and managed 26 t-eir users( fall in t-e semi-formal
se1tor. Eepresentati5e of t-e Informal finan1ial se1tor are non-go5ernmental organi?ations N@%s"( and 5er6
informal pri5ate lenders F indi5idual mone6lenders( traders and s-op+eepers. ;-e differen1e 2etween t-e
1ategories for t-e purpose of t-e paper would 2e t-at Institutions t-at fall in t-e <ormal <inan1ial Se1tor are
regulated( w-ile t-ose in t-e Informal <inan1ial Se1tor are not regulated.
1.1.4 Small and Medium Enterprise in Kenya
Small and medium enterprises SMEs" are d6nami1 entities w-ere some grow into larger enterprisesC some
sta2ili?e wit-out 1-anging t-e s1ale of operation( w-ile ot-ers disappear. ;-e Sessional !aper No. 2 on small
enterprise and Jua 3ali de5elopment in 3en6a @o3( 200)" set out a 1ompre-ensi5e poli16 framewor+ to
promote t-e growt- and 1atal6?e t-e transition of SME. ;-is was to 2e a1-ie5ed 26 en-an1ing dire1t assistan1e
to t-ese enterprises 26 primaril6 fa1ilitating a11ess to finan1e( 1redit( and information to t-is se1tor. Mi1ro
Enterprises were t-en e7pe1ted to register positi5e growt-.
;-e support and re1ognition of t-e role and importan1e of mi1ro and small enterprises in 3en6a dates
2a1+ to t-e 1olonial period. ,1ti5e parti1ipation in t-is se1tor 26 t-e go5ernment 2egan in 1992 w-en t-e
go5ernment de5eloped t-e first Sessional !aper No. 2 on 4nemplo6ment w-ere t-e go5ernment identified its
primar6 1-allenge as its a2ilit6 to find wa6s to -elp a11elerate t-e e7pansion of SMEs as a strategi1 a5enue of
*o2 1reation in 3en6a @o3( 200)". In Sessional !aper No. 1( 2005 on E1onomi1 Management for Eenewed
@rowt- a1+nowledged t-e in1reasing importan1e of t-e informal se1tor in e1onomi1 de5elopment wit- respe1t to
emplo6ment 1reation( parti1ularl6 in t-e fa1e of t-e e1onomi1 1risis and stru1tural ad*ustment poli1ies t-at were
pre5ailing at t-at time @o3( 2002". In 19#9( t-e go5ernment pu2lis-ed a do1ument entitled( G, Strateg6 for
Small and Medium Enterprises SMEs" /e5elopment in 3en6a ;owards t-e 6ear 2000( w-i1- fo1used on t-e
1onstraints t-e se1tor was e7perien1ing. Sessional !aper No. 2 of 200' on Small enterprises and Jua 3ali
/e5elopment in 3en6a set out a poli16 framewor+ to en-an1e assistan1e to indi5idual entrepreneurs and small
s1ale enterprises. ;-is was e7pe1ted to pre1ipitate t-e transition of mi1ro and small enterprises into medium-
si?ed enterprises 26 among ot-er strategies( fa1ilitating eas6 a11ess to 1redit and information to t-is se1tor @o3(
200'".
;-e National !o5ert6 Eradi1ation !lan 1999 F 2015 re1ogni?ed t-at t-e SME se1tor emplo6ed 80.2 per1ent of
t-e total national wor+ing population 26 1999. ;-e !lan e7pe1ted t-e se1tor to e7pand at growt- rate of ' per1ent
per annum( t-roug- pro5ision of finan1e in1enti5es from 2an+s and M<Is to maintain t-e sur5i5al li5eli-oods for
t-e e1onomi1all6 disad5antaged in t-e population. In t-is regard( t-e E1onomi1 Sur5e6 200)" s-owed t-e
tremendous growt- of t-e informal se1tor in t-e 1reation of *o2 opportunities. %ut of a total re1orded national
emplo6ment figure of 8($$#(500 persons( t-e informal se1tor a11ounted for 5(5)5(200 *o2s as 1ompared to
1(89$($00 *o2s in t-e formal se1tor. In full re1ognition of t-is fa1t( t-e go5ernment de1lared its intention to 1reate
*o2 opportunities 26 di5ersifi1ation of SMEs t-roug- 1apa1it6 2uilding using mi1ro finan1e programs. ;-is is a
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1learl6 a1-ie5a2le po5ert6-eradi1ation strateg6 1onsidering t-at t-e mi1ro enterprise se1tor alone needs to
register a growt- of 10 per1ent per 6ear a1ross t-e 2oard to 2e a2le to generate 550('$# *o2 opportunities per
6ear.
,11ording to re1ent stud6 t-ere -as 2een formation of @EMS( @rowt- Enterprise Mar+et Segments(
mid 1ap segment w-i1- are e7pe1ted not to di5ersif6 arenas of long-term 1apital for SMEs 2ut raise standard
wit-in 1apital mar+ets t-roug- additional listing. ;-e mid1ap( 2eing +e6 dri5ers of 5ision 20$0( -as wit- fo1us
on SMEs designed to pla6 a role as engine for e1onomi1 growt-( po5ert6 eradi1ation and emplo6ment 1reation.
Aen1e -a5e 2een seen t-e need for M<Is to 1reate 1ounter to tap into new pool of funds for t-e SMEs at 1-eap
rates. 3en6a as of now -as a2out 1.' million registered SMEs 1onsisting a2out 9'H of all 2usiness enterprises.
Aa5e seen to emplo6 5.1million people a11ounting 85H of total la2our to 1ontri2ute 20H to 3en6a=s @/!.
1.1.5 Microfinance Sector in Kenya
;-e mi1rofinan1e industr6 started in 3en6a a2out 20 6ears ago( 2ut it onl6 gained t-e status of an industr6 in t-e
past ten 6ears( w-ere it is generall6 1ategori?ed along two lines Aospes et al.( 2002( pp. 2$-5". <irst and most
1ommon is t-e formal 5ersus informal. <ormal pro5iders are registered 26 3en6an law. Informal pro5iders are
su2*e1t to self-regulation or group-2ased rules. Se1ond( mi1rofinan1e in 3en6a 1an 2e 1ategori?ed as 1lient- or
mem2er-2ased. In mem2er-2ased organi?ations( mem2ers pro5ide t-e resour1es as well as 1onstituting t-e main
target group for t-e loans. ;-ese are 1ooperati5es. In 1lient-2ased organi?ations( t-e 1ustomers are distin1t from
t-e owners. Bustomers are not in5ol5ed wit- t-e management of t-e organi?ation.
;-e potential of using institutional 1redit and ot-er finan1ial ser5i1es for po5ert6 alle5iation in 3en6a
is >uite signifi1ant. ,2out 1# million people( or '0H of t-e population( are poor and mostl6 out of t-e s1ope of
formal 2an+ing ser5i1es %mino( 2005". ,11ording to t-e National Mi1ro and Small Enterprise Baseline Sur5e6
of 1999( t-ere are 1lose to 1.$ million MSEs emplo6ing nearl6 2.$ million people or 20H of t-e 1ountr6=s total
emplo6ment and 1ontri2uting 1#H of o5erall @/! and 25H of non-agri1ultural @/! BBS-IBE@-3-Eep( 1999".
/espite t-is important 1ontri2ution( onl6 10.)H of t-e mi1ro and small enterprises MSEs" re1ei5e 1redit and
ot-er finan1ial ser5i1es. ;-e formal 2an+ing se1tor in 3en6a o5er t-e 6ears -as regarded t-e informal se1tor as
ris+6 and not 1ommer1iall6 5ia2le %mino( 2005".
;-e go5ernment of 3en6a re1ogni?es t-at greater a11ess to( and sustaina2le flow of finan1ial ser5i1es(
parti1ularl6 1redit( to t-e low-in1ome -ouse-olds and MSEs is 1riti1al to po5ert6 alle5iation. ;-erefore( an
appropriate poli16( legal and regulator6 framewor+ to promote a 5ia2le and sustaina2le s6stem of mi1rofinan1e
in t-e 1ountr6 was de5eloped 5ia t-e /eposit ;a+ing Mi1ro <inan1e Bill %mino( 2005". In drafting t-e Bill( t-e
@o5ernment -as 1onsulted wit- sta+e-olders to get t-eir 5iews on t-e 2est wa6 to 1reate t-e re>uired ena2ling
en5ironment for t-e mi1rofinan1e su2-se1tor. ;-e 2ill was su2se>uentl6 signed into .aw on /e1em2er 29( 200'
as 3en6a=s Mi1rofinan1e ,1t( 200'"( 2ringing t-e M<Is t-at intend to ta+e deposits from t-e pu2li1 under BB3
super5ision and regulation. 0-ile spe1ifi1 prudential regulations -a5e 2een de5eloped for t-e M<Is t-at are
registered wit- t-e BB3 as /eposit ;a+ing Mi1rofinan1e /;Ms" Institutions( t-e treatment of Non-deposit
ta+ing regulation was delegated to t-e Minister for <inan1e under se1tion $2" of t-e same ,1t BB3( 200#".
1.1.6 MI and SME !e"elopment in #ural $reas
Ban+s -a5e failed to pro5ide 1redit to t-e poor and most found in de5eloping 1ountries and to 2e more spe1ifi1 in
t-e rural areas. ;-e reasons gi5en 26 &on !is1-+e 2001" are t-at t-eir poli1ies are not meant to fa5our t-e poor.
;-e poor are mostl6 illiterate and 2an+s la1+ s+ills to target t-ese rural 1ustomers. In t-ese areas( t-e population
densit6 is 5er6 low 1ausing -ig- transa1tion 1ost 26 t-e finan1ial institutions sin1e t-e6 need to mo5e for long
distan1es and also ta+es time to meet t-e 1ustomers. SMEs in de5eloping 1ountries are 1onsidered to 2e too
unsta2le 26 2an+s to in5est in. /ue to t-is insta2ilit6( t-e 2an+s 1onsider SMEs to -a5e -ig- ris+ and t-e 1osts
t-ese 2an+s suffer to monitor t-e a1ti5ities of t-e SMEs are -ig-. B-atta1-ar6a et al.( 2000" identif6 t-at 2an+s
are relu1tant to lend to SMEs sin1e in5esting in SME a1ti5ities is 1onsidered 26 2an+s to 2e 5er6 ris+6. ;-e6 find
it ris+6 in t-e sense t-at if in5ested in( and in an e5ent of unfa5oura2le 2usiness 1onditions( t-e6 -a5e low
finan1ial power( assets( and easil6 go 2an+rupt.
;-e 1ost of 2orrowing from 2an+s is 5er6 -ig- and t-is pre5ents SMEs to 2orrow from t-ese
institutions 2ut t-ese 1osts to 2orrow are sometimes su2sidi?ed 26 t-e go5ernment. ;-e appli1ation pro1ess for a
loan is long and diffi1ult for SMEs to meet t-e demands. ;-e 1ollateral demanded 26 2an+s for a loan is 2ased
on fi7ed assets and w-i1- are 5er6 -ig- in order to -inder t-ese 2usinesses to a1>uire loans. ;-e6 1annot afford
t-ese 1ollaterals w-i1- in1ludeC estates( and ot-er fi7ed assets 5alued usuall6 at 200H of t-e loan Meag-er(
199#". ;-e ma*or set2a1+ t-at pre5ents SMEs to get funding from e7ternal sour1es is t-e pro2lem of information
as6mmetr6. ;-at is t-e magnitude of t-e de5iation of t-e 1orre1t information t-at is needed 26 t-e lending
institution.
Ban+s use 1as- flows and profita2ilit6 to measure or to assess t-e wort-iness of a 2usiness. ;-is is a
5er6 e7pensi5e and not a good met-od to measure t-e 1redit strengt- of rural SMEs. !rodu1tion and distri2ution
in t-e rural areas are influen1ed 26 so1ial fa1tors t-at are often negle1ted 26 enterprises in de5eloping 1ountries
%tero et al.( 200)". ,gri1ulture dominates rural a1ti5ities in de5eloping 1ountries and is dependent on t-e
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weat-er 1onditions for its output.

%# &iterature 'e(ie
Mi1rofinan1e is defined as a de5elopment tool t-at grants or pro5ides finan1ial ser5i1es and produ1ts su1- as
5er6 small loans( sa5ings( mi1ro-leasing( mi1ro-insuran1e and mone6 transfer to assist t-e 5er6 or e71eptionall6
poor in e7panding or esta2lis-ing t-eir 2usinesses. It is mostl6 used in de5eloping e1onomies w-ere SMEs do
not -a5e a11ess to ot-er sour1es of finan1ial assistan1e Eo2inson( 200#". In addition to finan1ial intermediation(
some M<Is pro5ide so1ial intermediation ser5i1es su1- as t-e formation of groups( de5elopment of self
1onfiden1e and t-e training of mem2ers in t-at group on finan1ial litera16 and management .edgerwood( 1999".
;-ere are different pro5iders of mi1rofinan1e M<" ser5i1es and some of t-em are( N@%s( sa5ings and loans
1ooperati5es( 1redit unions( go5ernment 2an+s( 1ommer1ial 2an+s or non 2an+ finan1ial institutions. ;-e target
group of M<Is are self-emplo6ed low in1ome entrepreneurs w-o areC traders( seamstresses( street 5endors( small
farmers( -airdressers( ri1+s-aw dri5ers( artisans 2la1+smit- et1 .edgerwood( 1999".
;-e mi1ro finan1e industr6 in 3en6a -as e7perien1ed rapid growt- o5er t-e 6ears in an attempt to meet
t-e large demand from t-e estimated $# per 1ent of 3en6an=s la1+ing a11ess to finan1ial ser5i1es
www.+en6a2ureau ofstatisti1s.1om". ;-e demand for mi1ro-finan1e ser5i1e in 3en6a is -ig- 6et t-e industr6 is
onl6 a2le to meet a2out 20 per1ent of t-eir demand. Mi1ro finan1ial se1tors in 3en6a -a5e rapidl6 e7panded as a
sour1e of 1redit for small s1ale 2usinesses.
,s t-e twent6 first 1entur6 un5eils( t-e interest and resour1es de5oted to mi1ro finan1es 1ontinue to
grow. 4sing 1redit deli5er6 approa1-es t-at redu1e t-e transa1tion 1osts of small-s1ale lending( t-ere are now
t-ousands of mi1ro 1redit programmes in 2ot- de5eloping and de5eloped 1ountries 0orld Ban+ 2000".;-e
growt- of M<Is -as 2een a11ompanied 26 se5eral de2ates in1luding a 1on1ern t-at mi1ro 1redit en1ourages t-e
poor to ta+e on detrimentall6 -ig- le5els of inde2tedness Aulme and Mosle6( 200'". ,t t-e same time( t-ere -as
2een in1reasing re1ognition t-at t-e SMEs need more t-an 1reditC t-e6 need a full range of mi1ro finan1e
ser5i1es( in1luding sa5ings and insuran1e ser5i1es. ,s t-e industr6 matures( M<Is -a5e 2een 1-allenged to
2e1ome finan1iall6 self suffi1ient. In some wa6s( t-e pus- towards finan1ial sustaina2ilit6 for t-e M< industr6
1ompletes a 1ir1le. 0-at 2egun as effort to -elp t-e poor 2enefit from t-eir own 2usinesses -as s-ifted o5er time
to fo1us on sound 2usiness pra1ti1e wit-in t-e mi1ro finan1e industr6 t-at in1reases t-e finan1ial management
options Se2stad D B-en( 199'". 3-andler( 199#" >uestions w-et-er finan1iall6 sustaina2le mi1ro finan1e
industr6 will 1ontinue to pro5ide finan1ial ser5i1es to t-e original 1lientele.
In addition( Se2stad( 199#" asserts t-at in t-e pus- for finan1ial sustaina2ilit6( t-ere ma6 2e a 1lient
1reep awa6 from t-e lower in1ome 1lients. ;-is raises a num2er of >uestions( do t-e 1lients of M<I 2enefit from
t-e 1redit or ot-er ser5i1es t-e6 re1ei5eI /o mi1ro finan1e programs rea1- t-e poorI ,re t-e 2enefits
e7perien1ed more wit-in t-e mi1ro enterprise( or do t-e6 spill o5er into t-e -ouse-old or to t-e indi5idual
entrepreneur more generall6I Snodgrass( 199'". ;-ese 1on1erns -a5e pro5ided an impetus to t-e sear1- for
met-ods of assessing t-e influen1e of mi1ro finan1e in t-e po5ert6 le5els of 1lients at indi5idual and enterprise
le5el Se2stad( 2000".
;-e answers to t-ese 2asi1 >uestions are of interest to finan1iers and pra1titioners w-o need to +now
w-ere to fo1us t-eir efforts in order to effe1ti5el6 -elp spe1ifi1 groups. ;-e6 need to +now w-et-er t-eir
programmes -a5e su11eeded in eliminating fundamental growt- 2arriers in t-e deli1ate growt- d6nami1s of
SMEs( espe1iall6 2arriers arising from t-e la1+ of eas6 a11ess to 1redit 1riti1all6 needed to fund SME growt-.
;-e6 also need to esta2lis- w-et-er a11ess to 1redit -as 1atal6?ed growt- and transition of t-e mi1ro enterprise(
and t-e e7tent to w-i1- t-e growt- is attri2uta2le to t-eir mi1rofinan1e inter5entions Se2stad D Bo-en( 2000". It
is not until re1entl6 t-at mi1rofinan1e -ad gained re1ognition t-an+s to t-e no2le pri?e winner Junus
Mu-ammad of t-e @rameen Ban+ and James Mwangi of E>uit6 Ban+. It s-ould 2e noted t-at mi1rofinan1e is a
main tool t-at fosters de5elopment in de5eloping 1ountries. ;-e la1+ of finan1ial power 1ontri2utes to so1ietal
pro2lems w-i1- emanate from po5ert6 leading to la1+ of good -ealt-1are s6stem( edu1ation( nutrition.
Mi1rofinan1e target t-e poor 1onsidered ris+6 26 1ommer1ial 2an+s Keller D S-arma( 199#".
;-e 4N poli16 framewor+ on t-e glo2al impa1t of M< as a tool to indu1e growt- 1annot 2e gainsaid.
4nited Nations= @eneral ,ssem2l6 de1lared t-e 6ear 2005 as t-e international 6ear of Mi1ro Bredit 4N( 2010".
;-is resolution re>uired mem2er states to 1ommit t-emsel5es to laun1-ing a glo2al mo5ement w-i1- would
rea1- 100 million of t-e world=s poorest families wit- mi1ro 1redit fa1ilities for self-emplo6ment. ;-e @eneral
,ssem2l6 full6 re1ogni?ed t-e role of M< in t-e growt- of SME as a glo2al p-enomenon of po5ert6 alle5iation(
po5ert6 eradi1ation and wealt- 1reation among t-e world=s poorest 4N( 2010".
, stud6 of t-irteen M<Is in se5en 1ountries 1arried out 1on1ludes t-at -ouse-old in1ome tends to
in1rease at a de1reasing rate as t-e in1ome and asset position of t-e de2tors is impro5ed. /iagne and Keller
2001" in t-eir stud6 in Malawi suggest t-at mi1rofinan1e do not -a5e an6 signifi1ant effe1t in -ouse-old in1ome
meaning no effe1t on SME de5elopment. In5esting in SME a1ti5ities -as no effe1t in raising -ouse-old in1ome
2e1ause t-e infrastru1ture and mar+et is not de5eloped.
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.ow-in1ome earners -a5e a serious -indran1e in gaining a11ess to finan1e from formal finan1ial
institutions. %rdinar6 finan1ial intermediation is not more often t-an not enoug- to -elp t-em parti1ipate( and
t-erefore M<Is -a5e to adopt tools to 2ridge t-e gaps 1reated 26 po5ert6( gender( illitera16 and remoteness. ;-e
1lients also need to 2e trained so as to -a5e t-e s+ills for spe1ifi1 produ1tion and 2usiness management as well as
2etter a11ess to mar+ets so as to ma+e profita2le use of t-e finan1ial resour1e t-e6 re1ei5e Bennett( 200)". In
pro5iding effe1ti5e finan1ial ser5i1es to t-e poor re>uires so1ial intermediation. ;-is is Gt-e pro1ess of 1reating
so1ial 1apital as a support to sustaina2le finan1ial intermediation wit- poor and disad5antaged groups or
indi5idualsL Bennett( 200)". Some mi1rofinan1e institutions pro5ide ser5i1es su1- as s+ills training( mar+eting(
2oo++eeping( and produ1tion to de5elop enterprises. So1ial ser5i1es su1- as -ealt- 1are( edu1ation and litera16
training are also pro5ided 26 some M<Is and 2ot- enterprise de5elopment and so1ial ser5i1es 1an impro5e t-e
a2ilit6 of t-e low-in1ome earners to operate enterprises eit-er dire1tl6 or indire1tl6 .egerwood( 1999".
;-e ser5i1es pro5ided to mi1rofinan1e 1lients 1an 2e stated into9 <inan1ial intermediation or t-e
pro5ision of finan1ial produ1ts and ser5i1es su1- as sa5ings( 1redit( insuran1e( 1redit 1ards( and pa6ment s6stems
s-ould not re>uire ongoing su2sidies. So1ial intermediation is t-e pro1ess of 2uilding -uman and so1ial 1apital
needed 26 sustaina2le finan1ial intermediation for t-e poor. Su2sidies s-ould 2e eliminated 2ut so1ial
intermediation ma6 re>uire su2sidies for a longer period t-an finan1ial intermediation.
Enterprise de5elopment ser5i1es or non-finan1ial ser5i1es t-at assist mi1ro entrepreneurs in1lude s+ills
de5elopment( 2usiness training( mar+eting and te1-nolog6 ser5i1es( and su2se1tor anal6sis. ;-is ma6 or ma6 not
re>uire su2sidies and depends on t-e a2ilit6 and willingness of t-e 1lients to pa6 for t-ese ser5i1es.
So1ial ser5i1es or non-finan1ial ser5i1es t-at fo1us on ad5an1ing t-e welfare of mi1ro entrepreneurs
and t-is in1lude edu1ation( -ealt-( nutrition( and litera16 training. ;-ese so1ial ser5i1es are li+e to re>uire
ongoing su2sidies and are alwa6s pro5ided 26 donor supporting N@%s or t-e state Bennett( 200)C .egerwood(
1999".

)# Methodology
)#" *he research design
;-e resear1- design adopted in t-is stud6 was des1ripti5e sur5e6 approa1- t-at was used to assess t-e M<I
funding of small and medium enterprises in rural Murang=a Bount6. ;-is t6pe of des1ripti5e resear1- gi5es a
s6stemati1 1olle1tion and anal6sis of data in order to answer >uestions 1on1erning t-e 1urrent status of a
programme( proposal or a1ti5it6 as t-e6 are. Mugenda D Mugenda( 200$". ;-is also 2orrows from 3om2o D
;romp( 200'" assertion t-at a des1ripti5e design is a des1ription of t-e state affairs( as it e7ists. /es1ripti5e
resear1- design is a met-od of 1olle1ting information 26 inter5iewing or administering a >uestionnaire to a
sample of indi5iduals Mugenda D Mugenda( 200$".
3.2 Tar%et &opulation
Mugenda and Mugenda 200$" defines target population as all mem2ers of a real or -6pot-eti1al set of people(
e5ents or o2*e1ts to w-i1- an in5estigator wis-es to generali?e t-e results of a resear1- stud6. In t-is stud6( t-e
target population 1onsisted of 500 SME owner managers from Murang=a Bount6. It soug-t to assess t-e effe1t of
t-e SMEs performan1e after 1redit a1>uisition from M<Is. ;-e resear1-er gat-ered information from indi5iduals
from M<I 1lients in Murang=a.
3.3 Sample si'e
, sample is a su2*e1t of t-e target population w-i1- t-e resear1-er intends to generali?e t-e findings Mugenda
D Mugenda( 200$". In t-is stud6( a total of 50 respondents was sele1ted to represent t-e SMEs in5ol5ingC 5 +ios+
owners( $ tailors( # farmers( ' -aw+ers( ' Jua 3ali artisans( ) -air st6lists( ) gro1er6 5endors( ) 1ommer1ial
1olleges( ) w-olesalers and 2 2ar2ers.
*able )#" Sample frame
Category Population Percentage Sample
3ios+ owners 5) 10 '
;ailors $) 10 $
<armers ## 10 9
Aaw+ers ') 10 8
Jua +ali ,rtisans ') 10 '
Salons )) 10 5
@ro1er6 5endors )) 10 )
Bommer1ial 1olleges )0 10 )
0-olesalers )) 10 )
Bar2ers 2) 10 2
*otal +,, +,
Source! 'esearch -ata %,")
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3.4 Samplin% Tec(ni)ue
;o get a representati5e sample for t-e stud6( t-e resear1-er used stratified sampling pro1edure.
3.5 !ata *ollection Instruments
;-e resear1-er used >uestionnaires and inter5iews to 1olle1t data.
3.6 +uestionnaires
, largel6 pre-1oded >uantitati5e >uestionnaire was used to gat-er information from respondents. ;-ese
>uestionnaires drew on sur5e6 tools used in ot-er studies 1ondu1ted internationall6 on t-is su2*e1t( w-i1- was
adopted to refle1t t-e 1ultural and en5ironmental 1onte7t in Murang=a Bount6. ;-e >uestionnaire were tested and
refined on t-e 2asis of a 1ompre-ensi5e pilot or pre-test e7er1ise. ;-e >uestionnaire were gi5en to all owner
managers as respondents a1ross t-e age spe1trum of 1# 6ears and a2o5e( and e7plore per1eptions and feelings(
general e7perien1es( as well as +nowledge on SMEs related to t-e funding issues t-e6 fa1e.
3., Inter"ie- Sc(edules
;-is inter5iew s1-edules were used to 1olle1t data from SMEs 1lients. ;-is ena2led t-e resear1-er to o2tain
more aut-enti1 information 2e6ond t-e limited >uestionnaire sin1e respondents tend to gi5e more and ade>uate
information 2esides ena2ling t-e resear1-er -as t-e ad5antage of 1omparing 2ot- t-e answers gi5en and t-e 2od6
language -en1e assisted t-e resear1-er to determine t-e aut-enti1it6 of t-e information.
)#. 'eliability and /alidity
Joppe 2000" defines relia2ilit6 as t-e e7tent to w-i1- results are 1onsistent o5er time and an a11urate
representation of t-e total population under stud6 and if t-e results of a stud6 1an 2e reprodu1ed under a similar
met-odolog6( t-en t-e resear1- instrument is 1onsidered to 2e relia2le.
%n t-e ot-er -and( 5alidit6 determines w-et-er t-e resear1- trul6 measures t-at w-i1- it was intended to
measure or -ow trut-ful t-e resear1- results are. ;-erefore wit- t-e gi5en definition( t-e resear1-er was +een on
t-e 1onsisten1e and a11ura16 of t-e results. S-e 1-e1+ed out on w-et-er t-ere=s trut-fulness in t-e results.
)#0 -ata Collection Process
;-e resear1-er=s letter of introdu1tion was produ1ed in order to arrest an6 suspi1ions and eli1it serious response.
;-e resear1-er administered t-e >uestionnaires personall6 wit- assistants 2e1ause t-e group was large. ;-e
resear1-er t-us got to e7plain t-e purpose of t-e stud6 and personall6 answer respondents >uestions. , fa1e to
fa1e intera1tion wit- t-e respondents 2e1ame an effe1ti5e wa6 to eli1it t-e 1o-operation of t-e respondents in
data 1olle1tion.
3.11 !ata $nalysis and &resentation
;-e data from t-e respondents were edited( 1oded and tallied a11ording to t-eir t-emes and were anal6?ed 26 use
of des1ripti5e statisti1s su1- as means( fre>uen1ies( and per1entages. ;-e results were presented in ta2les of
fre>uen16 distri2utions( per1entages( pie 1-arts( 2ar grap-s and figures. Mualitati5e data were anal6?ed and
reported t-emati1all6.

1#,# Findings
4.1. #e%ression $nalysis
;-e linear regression anal6sis models relations-ip 2etween t-e dependent 5aria2le w-i1- is M<I funding on
performan1e of SMEs and independent 5aria2les w-i1- are managerial s+ills( training( finan1ial s+ills and
te1-nolog6. ;-e 1oeffi1ient of determination E
2
and 1orrelation 1oeffi1ient r" s-ows t-e degree of asso1iation
2etween 5aria2les and M<I funding on performan1e of SMES in Murang=a. ;-e results of t-e linear regression
indi1ate t-at E
2
N.80) and EN .#$9 t-is is an indi1ation t-at t-ere is a strong relations-ip 2etween managerial
s+ills( training( te1-nolog6( finan1ial s+ills and M<I funding on t-e performan1e of SMEs in Murang=a.
;-e findings 1on1ur wit- t-ose of Marr( 200#" w-o postulates M<I funding on t-e performan1e of
SMEs to 2e +e6 fa1tors for 1ompan6 su11ess and important le5ers for 5alue 1reation. ;-eir 1ore 1ompeten1e is
in5isi2le assets rat-er t-an 5isi2le assets. Asu and <ang ( 2010" re5ealed t-at M<I funding on performan1e of
SMEs is 2e1oming a 1ru1ial fa1tor for a firmOs long-term profit and performan1e t-at identif6 t-eir 1ore
1ompeten1e as in5isi2le assets rat-er t-an 5isi2le assets.

*able 1#"! Model summary
Model ' ' S2uare
1 .#$9 .80)

;a2le ).1 indi1ates t-at ! 5alue N 0.000 w-i1- is less t-an 5H. ;-is s-ows t-at t-e o5erall model is signifi1ant. It
furt-er implies t-at managerial s+ills( training( te1-nolog6( and finan1ial s+ills -a5e a signifi1ant effe1t on M<I
funding on t-e performan1e of SMES in Murang=a. ,11ording to /aud and Jusoff 2010" indi1ated t-at
performan1e of SMES in a +nowledge- 2ased e1onom6 are re1ogni?ed as t-e most important sour1e of
1ompetiti5e ad5antage parti1ularl6 for SMEs.
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*able 1#%! A34/A
A34/A
a

Model Sum of S2uares df Mean S2uare F Sig#
1 Eegression 1#09.02# 5 $'1.#0' #8.$91 .000
Eesidual 8'1.885 $15 ).1)0
;otal 2580.#0$ $20
a. /ependent &aria2le9 !erforman1e
2. !redi1tors9 Bonstant"( management s+ills( te1-nolog6( finan1ial S+ills( training

*able 1#)! Coefficients
Coefficients
a

Model 5nstandardi6ed
Coefficients
Standardi6ed
Coefficients
t Sig#
B Beta
Bonstant" -.119 -.1'# .#'8
Managerial s+ills .101 .$8) '.255 .000
;raining -.020 -.085 1.#)9 .0''
;e1-nolog6
<inan1ial s+ills
.00'
-.012
.009
.150
.210
.211
.#$)
.10$
a. /ependent &aria2le9 !erforman1e

1#% Conclusion
;-e 1ru7 of t-is stud6 was to e7plore t-e influen1e of M<I funding on t-e performan1e of SMEs in Murang=a.
;-e output gi5en from t-e findings indi1ate t-at t-ere is a signifi1ant positi5e relations-ip 2etween M<I funding
and performan1e on SMEs namel6 Bredit( Managerial s+ills MS"( ;raining s+ills ;S" and ;e1-nolog6;" wit-
performan1e of SMEs.
;-e findings also indi1ated t-at managerial s+ills -a5e 2een a ma*or 1ontri2utor towards M<I funding
on t-e performan1e of SMEs in Murang=a. ;-is is in line wit- 3amat- 200#" w-o found t-at managerial s+ills
appeared as t-e ma*or 1ontri2utor towards t-e performan1e of SMEs. ;-e results also re5ealed t-at t-e training
s+ills and te1-nolog6( -a5e positi5e relations-ip wit- M<I funding on performan1e of SMEs in Murang=a. ;-e
findings demonstrated t-at M<I funding on performan1e of SMEs 1an 2e used to mo2ili?e( assem2le( and
manage all intangi2le resour1es in order to en-an1e M<I funding on performan1e of SMEs in Murang=a and t-is
1on1ur wit- t-e findings of ot-er studies Bontiset al.( 2000C Salina and 0an <ad?ila-( 200#C B-en etal.(2005C
3amat-( 200#C". 4ndou2tedl6( M<I funding -as 1ontri2ution towards t-e performan1e of SMEs.
;-e findings emp-asi?e t-e importan1e of t-e elements of M<I funding on performan1e of SMEs
w-i1- 1omprise of managerial s+ills( training s+ills( and te1-nolog6 in Murang=a. ;-is is a pointer t-at as M<I
funding in1reases( it is e7pe1ted t-at performan1e of SMEs will 2e en-an1ed.
;-e stud6 is a *ustifi1ation of t-e fa1t t-at an entrepreneur wit- good managerial s+ills( e71ellent
training( suffi1ient 1apital and modern te1-nolog6 -as a deep understanding of t-e Small and Medium si?ed
enterprises w-i1- 1atapults t-eir performan1e to a large e7tent. Spe1ifi1all6( t-e stud6 re1ommended t-at owner
or managers of small and medium enterprises s-ould possess managerial s+ills to effe1ti5el6 plan( lead( organi?e
and 1ontrol t-e enterprise effe1ti5el6 leading to in1reased performan1e. Better 1ontrol in produ1tion 1ost w-ile
maintaining 1ompetiti5e pri1es results in 1ontinued profita2ilit6 of a firm and t-erefore good performan1e.
%wnerPmanagers s-ould also 2e effi1ient finan1ial managers wit- a 1ontrol on t-e SMEs 1ost of operation to
-elp pro5ide proper 2oo+-+eeping and 1ompetiti5e pri1es w-i1- fit t-e SMEs= 1lient needs.

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