An Investigation of Financial Constraints and Their Impact on Performance of Micro Finance Institutions in Kenya

Abstract

The development of small firms is considered a key ingredient in poverty reduction. These small businesses face specific constraints in raising external finance and as a result, worldwide, microfinance institutions (MFIs) have come in to expand the frontier of finance by providing loans and other financial services to under-served small firms and populations. However, by the nature of clients that the MFI deal with and their size of capital structures, these organizations face financial constraints that impact on their performance level. The purpose of the study was to investigate the impact that financial constraints affect the level of loan disbursement level of micro finance institutions in Kenya and towards the realization of the research objective both a descriptive analysis and correlation and regression analysis was undertaken. Data was collected through the use of a questionnaire that was distributed to all the sampled MFIs and also secondary data was collected from the organizations financial statements. The study found out that the dependence on donor funds by the local MFIs affected their capacity to advance loans to potential customer and there is need to reduce this present level of dependence. The study also found out that most MFIs had a low capital base and that is way they tend to depend mostly in donors and the low capital base is further compounded by the risk aversion of lenders on the performance of MFIs that discourages them to lend to these small institutions. The study found that the regulation of the operation of the MFIs will help in increasing the confidence of these organizations and at the same time streamline the operation of the organization which will give it the necessary confidence to can result in their capital base being shored up.