Challenges Affecting Transformation of Microfinance Institutions into Deposit Taking Financial ...

168 Pages·2015·1.32 MB·English

Challenges Affecting Transformation of Microfinance Institutions into Deposit
Taking Financial Institutions in Kenya

George Koome Rukaria

A Thesis Submitted to the Department of Entrepreneurship, Technology,
Leadership and Management in the School of Entrepreneurship, Procurement
and Management in Partial Fulfilment of the Requirements for the Award of the
Degree of Doctor of Philosophy (Entrepreneurship) of Jomo Kenyatta University
of Agriculture and Technology

2015
DECLARATION
This thesis is my original work and has not been presented for a degree in any other
University.

Signature: ……………………………….. Date: ………………………………..
George Koome Rukaria

This thesis has been submitted for examination with our approval as University
Supervisors.

Signature: ……………………………….. Date: ………………………………..
Prof. Elegwa Mukulu
JKUAT, Kenya

Signature: ……………………………….. Date: ………………………………..
Dr. Maurice Sakwa
JKUAT, Kenya

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DEDICATION
This work is dedicated to my family and parents: wife Kanana Koome; children
Rimiri, Muriungi, Nkirote, Karimi and Muguna; and parents M’Rukaria M’Meru,
Charity M’Rukaria, Kiriinya Magiri and Wanja Kiriinya.

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ACKNOWLEDGEMENT
I wish to acknowledge the contributions and support from my supervisors Prof.
Elegwa Mukulu and Dr. Maurice Sakwa. They patiently guided and encouraged me
throughout the preparation of this thesis.

I am grateful to my corrections supervisor, Dr. Esther Waiganjo, for her diligent
guidance as I made the final corrections. I also thank the entire staff of the School of
Entrepreneurship, Procurement and Management for all the support they gave me.

I thank my senior and other colleagues at Maasai Mara University for their support,
understanding and encouragement: Professors David Serem, Joseph Chacha, Gerald
Kimani, Mary Walingo, Misia Kadenyi, Simon Seno, Almadi Obere and Nathan
Oyaro; Dr. Robert Kinanga, Mr. Renny Mutai, Mr. Simel Ole Sankei and Mr.
Maurice Ombok. I also appreciate the encouragement from my former colleagues at
Kenya Methodist University: Prof. Benjamin Makuyu, Dr. Samuel Mwachiro, Dr.
Kenneth Wanjau, Dr. Peter Nzioki, Mr. Wilson Muema and Mr. Ken Mugambi. I am
also grateful to Eng. Kimathi Ringera for the many times that he allowed me to use
his laptop in the initial stages of preparing this thesis. I commend Lamek Ronoh and
Denise Kasoo for assistance with the initial data entry; and Dr. Geoffrey Karau and
Dr. Paul Maithya for sharing their thoughts and very invaluable critiques as I was
writing the final thesis. Finally, I laud my classmates for the numerous discussions
and insights that helped to streamline my preliminary thinking for this thesis: Dr.
Christopher Mairura, Dr. Kennedy Kirima, Dr. Esther Kathure and Dr. Cyprian
Nkondi. May God bless all of you immensely!

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TABLE OF CONTENTS

PAGE
DECLARATION..................................................................................................................... ii
DEDICATION........................................................................................................................ iii
ACKNOWLEDGEMENT ..................................................................................................... iv
TABLE OF CONTENTS ........................................................................................................v
LIST OF TABLES ............................................................................................................... viii
LIST OF FIGURES ............................................................................................................... ix
LIST OF APPENDICES .........................................................................................................x
ABBREVIATIONS AND ACRONYMS .............................................................................. xi
DEFINITION OF TERMS................................................................................................... xii
ABSTRACT ............................................................................................................................xv

CHAPTER ONE: INTRODUCTION ....................................................................................1
1.1 Background to the Study ...................................................................................……..1
1.2 Statement of the Problem ............................................................................................7
1.3 Objectives of the Study ...............................................................................................8
1.3.1 General Objective .................................................................................................... 8
1.3.2 Specific Objectives .................................................................................................. 9
1.4 Research Questions .....................................................................................................9
1.5 Hypotheses ................................................................................................................10
1.6 Significance of the Study ..........................................................................................11
1.7 Scope of the Study.....................................................................................................13
1.8 Limitations of the Study ............................................................................................13

CHAPTER TWO: LITERATURE REVIEW .....................................................................15
2.1 Introduction ...............................................................................................................15
2.2 Theoretical Framework .............................................................................................15
2.2.1 Economic Theory of Entrepreneurship ................................................................... 16
2.2.2 Psychological Theory of Entrepreneurship ............................................................. 17
2.2.3 Sociological Theory of Entrepreneurship ............................................................... 18
2.2.4 Capital Theory and MFI Transformation ................................................................ 20
2.2.5 Human Capital Theory and MFI Transformation ................................................... 21
2.2.6 Stakeholder Theory and MFI Transformation ........................................................ 22
2.2.7 Agency Theory and MFI Transformation ............................................................... 23
2.3 Approaches to Provision of Microfinance and Models of MFI Transformation ......25
2.3.1 Approaches to Provision of Microfinance .............................................................. 25
2.3.2 Models of MFI Transformation .............................................................................. 29
2.4 Conceptual Framework .............................................................................................33
2.4.1 Planning for Transformation as a Challenge ......................................................... 37
2.4.2 Legal Compliance as a Challenge .......................................................................... 39
2.4.3 Management of Stakeholders as a Challenge ........................................................ 45
2.4.4 Institutional Change Management as a Challenge ................................................. 49
2.4.5 Transformation Status ............................................................................................ 54
2.5 Empirical Review ......................................................................................................55
2.6 Critique of Existing Literature Relevant to the Study ...............................................60
2.7 Research Gaps ...........................................................................................................61
2.8 Summary ...................................................................................................................62
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CHAPTER THREE: RESEARCH METHODOLOGY ....................................................64
3.1 Introduction ...............................................................................................................64
3.2 Research Design ........................................................................................................64
3.3 Target Population ......................................................................................................65
3.4 Sampling Frame ........................................................................................................66
3.5 Sample and Sampling Technique ..............................................................................67
3.6 Research Instrument ..................................................................................................68
3.7 Data Collection Procedure ........................................................................................69
3.8 Pilot Testing ..............................................................................................................69
3.9 Data Analysis and Presentation .................................................................................70

CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION .................................73
4.1 Introduction ...............................................................................................................73
4.2 Questionnaire Return Rate ........................................................................................73
4.3 Profile of Surveyed Institutions ................................................................................74
4.3.1 Period of Operating Microfinance in Kenya .......................................................... 74
4.3.2 Type of Institution Before Seeking to Transform .................................................. 76
4.3.3 Legal Form of Registration Before Seeking Transformation ................................ 78
4.3.4 Law Under Which Transformation was Sought .................................................... 79
4.3.5 Current Number of Operational Branches ............................................................. 80
4.3.6 Number of Active Clients Served .......................................................................... 82
4.3.7 Size of Current Loan Portfolio ............................................................................... 83
4.3.8 Lending Methodologies Before and After Seeking Transformation ..................... 85
4.3.9 Financial Services Other Than Credit (Loans) Being Offered .............................. 86
4.3.10 Reasons For Transformation .......................................................................... 87
4.4 Planning as a Challenge in the Transformation of MFIs into Deposit Taking
Financial Institutions in Kenya .................................................................................88
4.5 Legal Compliance as a Challenge in the Transformation of MFIs into Deposit
Taking Institutions in Kenya .....................................................................................92
4.6 Management of Stakeholders as a Challenge in the Transformation of MFIs into
Regulated Deposit Taking Institutions in Kenya ......................................................99
4.7 Institutional Change Management as a Challenge in the Transformation of MFIs
into Deposit Taking Financial Institutions in Kenya ..............................................104
4.8 Transformation Status of MFIs into Deposit Taking Financial Institutions in Kenya111
4.9 Suggestions for a Blueprint for Transformation of MFIs into Deposit Taking
Financial Institutions in Kenya ...............................................................................113

CHAPTER FIVE:SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ......120
5.1 Introduction .............................................................................................................120
5.2 Summary of Findings ..............................................................................................120
5.2.1 Institutional Profile and MFI Transformation Status in Kenya ............................ 120
5.2.2 Whether Planning is a Significant Challenge Affecting MFI
Transformation in Kenya ..................................................................................... 122
5.2.3 Whether Legal Compliance is a Significant Challenge Affecting MFI
Transformation in Kenya ..................................................................................... 123
5.2.4 Whether Management of Stakeholders is a Significant Challenge Affecting
Transformation of MFIs in Kenya ....................................................................... 124
5.2.5 Whether Institutional Change Management is a Significant Challenge
Affecting Transformation of MFIs in Kenya ....................................................... 125
5.3 Conclusions .............................................................................................................127
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5.4 Recommendations ...................................................................................................128
5.4.1 Planning for Transformation ................................................................................. 128
5.4.2 Legal Compliance ................................................................................................. 128
5.4.3 Management of Stakeholders ................................................................................ 129
5.4.4 Institutional Change Management ........................................................................ 129
5.4.5 Recommendations for Policy ................................................................................ 129
5.4.6 Areas for Further Research ................................................................................... 130

REFERENCES .....................................................................................................................131

APPENDICES ......................................................................................................................138

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LIST OF TABLES

Table 4.1: Questionnaire Return Rate ..................................................................................... 74
Table 4.2: Period of Microfinance Operations in Kenya and Transformation Status ............. 75
Table 4.3: Number of Operational Branches and Transformation Status ............................... 80
Table 4.4: Number of Active Clients and Transformation Status........................................... 82
Table 4.5: Size of Current Loan Portfolio and Transformation Status ................................... 83
Table 4.6: Ranking of the Reasons for Transformation .......................................................... 87
Table 4.7: Chi-Square Test for Independence for Planning Variable Items ........................... 90
Table 4.8: Descriptive Statistics for Level of Difficulty with Legal Compliance .................. 93
Table 4.9: Structure Matrix and Means for Legal Compliance Components ......................... 94
Table 4.10: Logistic Regression Predicting Likelihood of Reporting Successful
Transformation from Legal Compliance Factors ................................................. 97
Table 4.11: Descriptive Statistics for Level of Difficulty with Managing Stakeholders ...... 100
Table 4.12: Structure Matrix and Means for Managing Stakeholders Components ............. 101
Table 4.13: Logistic Regression Predicting Likelihood of Reporting Successful
Transformation from Managing Stakeholders Factors ....................................... 103
Table 4.14: Descriptive Statistics for Level of Difficulty with Institutional Change
Management ....................................................................................................... 105
Table 4.15: Structure Matrix and Means for Institutional Change Management
Components ........................................................................................................ 107
Table 4.16: Logistic Regression Predicting Likelihood of Reporting Successful
Transformation from Institutional Change Management Factors ...................... 109
Table 4.17: Basic Ingredients for MFI Transformation in Kenya ........................................ 114
Table 4.18: Priority Ranking of Factors Considered Necessary for MFI
Transformation ................................................................................................... 115
Table 4.19: Necessity of Various Steps in Licensing Process .............................................. 116
Table 4.20: Types and Sources of Support ........................................................................... 119

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LIST OF FIGURES

Figure 2.1: Conceptual Framework ............................................................................ 36
Figure 4.1: Type of Institution Before Seeking to Transform .................................... 77
Figure 4.2: Legal Form of Registration Before Seeking to Transform ...................... 78
Figure 4.3: Law Under Which Transformation was Sought ....................................... 79
Figure 4.4: Lending Methodologies Used Before and After Transformation ............ 85
Figure 4.5: Non-credit Financial Services Provided ................................................... 86
Figure 4.6: Whether Planning was a Challenge .......................................................... 89
Figure 4.7: Transformation Status ............................................................................ 112
Figure 4.8: Roles of CBK in MFI Transformation in Kenya.................................... 117
Figure 4.9: Roles of AMFI in MFI Transformation in Kenya .................................. 118

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LIST OF APPENDICES

Appendix 1: Research Questionnaire.............................................................................. 138
Appendix 2: Letter of Introduction ................................................................................ 145
Appendix 3: Sampling Frame......................................................................................... 146
Appendix 4: Approaches to the Provision of Microfinance............................................ 149
Appendix 5: Correlation Matrix for Legal Compliance Factors..................................... 150
Appendix 6: Correlation Matrix for Management of Stakeholders Factors.................... 152
Appendix 7: Correlation Matrix for Institutional Change Management Factors............ 153

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