Effect of Firm Characteristics on Performance of the Microfinance Sector in Nakuru, Kenya

Effect of Firm characteristics on Performance of the Microfinance Sector in Nakuru, Kenya

Zachary Muhindi Kisengo

A RESEARCH PROJECT SUBMITTED TO THE GRADUATE SCHOOL

IN PARTIAL FULFILLMENTOF THE REQUIREMENTSFOR THE AWARD OF THE DEGREE OF MASTERSIN BUSINESS ADMINISTRATION OF EGERTON UNIVERSITY

EGERTON UNIVERSITY

OCTOBER 2014

ABSTRACT

The development of entrepreneurship is an important economic development but is challenged by lack of capital. Microfinances are set up with the main objective of financing small enterprises but still they are not capable to meet the capital needs of the businesses. In spite of the importance of this sector, the provision and delivery of financial services by these firms has been below expectation. Literature suggests that firm characteristics determine performance of microfinances. However it is not clear to what extent these firm characteristics affect the performance of MFIs in Kenya. The aim of this study was to investigate the effect of firm characteristics on the performance of microfinance sector in Kenya. The study adopted correlational research design. A census study of the 48 institutions offering microfinance services and registered with Association of Microfinance Institution (AMFI) operating in Nakuru town was done. Primary data was collected using questionnaires. This was supplemented with secondary data. Data on firm characteristics and organizational performance was summarized using descriptive statistics. The relationship between firm characteristics and performance of MFIs was examined using Pearson’s product moment correlation coefficient. The effect of firm characteristics on performance of MFIs was determined by multiple regression analysis. The findings revealed that firm characteristics have a significant positive effect on the performance of MFIs. Structure related characteristics had the greatest effect; market related had moderate effect while capital related had the least effect on performance of MFIs. Therefore to improve on organizational performance of MFIs, it was recommended that practitioners need to address firm characteristics. The study also suggests areas of further research.

TABLE OF CONTENTS

DECLARATION AND APPROVAL……………………………………………….ii

DEDICATION……………………………………………………………………….iii

ACKNOWLEDGEMENT…………………………………………………………..iv

ABSTRACT…...... v

TABLE OF CONTENTS………………………………………………………...... vi

ABBREVIATIONS…………………………………………….…………………...vii

CHAPTER ONE: INTRODUCTION……………………………………………....1

1.1 Background of the Study……………………………………………………...... 1

1.1.1 Firm Characteristics………………………..……………………………...... 1

1.1.2 Organizational Performance………………………………………...……...... 2

1.1.3 Microfinance Institutions………………………………………...…………...2

1.2 Problem Statement……………………………………………………..……….....5

1.3 Objectives of the Study…………………….……………….………………..……5

1.4 Research Hypotheses………………….……………………………..…...….…….6

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

1.6 Scope and Limitations of the Study……..………………………………...... 6

1.7 Assumptions of the Study..………….………………………………...………...... 7

1.8 Definition of Terms...... …………….……………………………...…..……….....7

CHAPTER TWO: LITERATURE REVIEW……………………………..…….....8

2.1 Introduction……………………………………………………………………...... 8

2.2 Firm Characteristics………………………………..……………………...... 8

2.2.1 Structure Related………………………………………………..…...…….....8

2.2.2 Market Related…………………..……………………………………….…14

2.2.3 Capital Related………………………………………...... 19

2.3 Organizational Performance………………….……….……...…………....….….22

2.4 Firm Characteristics and Organizational Performance…...... 28

2.5 Theoretical Framework...…..……….……………….…………..……………….30

2.6 Conceptual Framework…………..………………….…………..……………….31

CHAPTER THREE: RESEARCH METHODOLOGY……………………...…..33

3.1 Introduction………………………………………………………………………33

3.2 Research Design………………………………………………………………….33

3.3 Target Population…………………………………………………………...... 33

3.4 Study Sample………………………………………………………………...…...33

3.5 Data Collection………………………………….…………...………….….….…34

3.6 Reliability and Validity….…………………...…………..…………...…….…....34

3.7 Data Analysis……………………….…………….……………..……………….34

CHAPTER FOUR: RESULTS AND DISCUSSION……..………………...…….35

4.1 Introduction……………………………………………………………………....35

4.2 Organizational Profile…………………………………………………………....35

4.3 Firm Characteristics……………………………………………………...... 36

4.3.1 Structure Related…………………………………………………….……...36

4.3.2 Market Related…………………..…………………………………....….…37

4.3.3 Capital Related………………………………………...... 38

4.4 Organizational Performance…………………………………………...………....38

4.5 Firm Characteristics and Organizational Performance……………….……….....39

4.6 Effect of Firm Characteristics on Performance ……………………………….....42

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS…………………………………………………………...44

5.1 Introduction……………………………………………………………………....44

5.2 Summary of Findings…………………………………………………….……....44

5.3 Conclusion………………………....……………………………………………..44

5.4 Recommendations…………………………………………………………...…...45

REFERENCES...... 47

APPENDICES……….……………………………...…………………….……...…54

Appendix1: Letter of introduction....……………………..………………..…….54

Appendix 2: Study Questionnaire…..……………………..………………..…….55

Appendix 3: Institutions Offering Microfinance Services in Nakuru …………....59