Responses of micro finance institutions to regulation through microfinance act 2006
Microfinance institutions are increasingly facing changing environmental conditions arising from government regulation of the industry that demand new strategic and operational responses. The individual microfinance institution's capacity to effectively match its strategies and capabilities to the changing environment will determine its competitive positioning in the micro finance industry. Kenya's microfinance institutions vary In formality, commercial orientation, professionalism, visibility, size, and geographical coverage. Regulation of the micro finance industry is a government effort to mainstream the industry into the financial sector. The licensing, regulation and supervision of deposit-taking micro finance institutions under the Microfinance Act 2006 is expected to enhance the orderly growth and development of a sound, vibrant and stable microfinance industry in Kenya. The objectives of the study were to establish the responses of the microfinance institutions to regulation through the Microfinance Act 2006, and also determine the factors influencing their responses to the regulation. The findings show that the most extensively used human resource strategies to respond to regulation included review of staff qualification and skills requirements to match regulatory requirements, and training top management and operational staff on new regulatory requirements and change management. Strategic partnership with telecommunication companies was a major adaptation aimed at increasing penetration and lowering costs. Other strategies employed by microfinance institutions included introduction of new products such as individual loans, technology-based products such as money transfer services to enhance the product- portfolio mix, and branding of products for differentiation. Long term debt as a source of funding was also a major adaptation making a significant shift from donor funding. The study utilized a cross-sectional survey design due to time constraints. The target population involved all the 45 micro finance institutions in the Association of the Micro Finance Institutions (AMFI membership). Primary data was collected using questionnaires. The data analysis was done using the Statistical Package for Social Science (SPSS). The study recommends that micro finance institutions should enhance their understanding of the legal and regulatory requirement to determine the risks in specific context of each regulation to avoid the pitfalls of predecessors. Financial management and reporting should be emphasized in MFIs. MFIs operators should adopt the legal and regulatory requirements in order to responds effectively to the Microfinance regulation. Further research should be done on other finance institutions in Kenya because different financial institutions have unique characteristics and diverse contextual realities that might influence their responses and consequently approach to different response strategies.