ROLE OF PLANNING IN TRANSFORMATION OF MICROFINANCE INSTITUTIONS INTO MICROFINANCE BANKS IN KENYA

Abstract

The Microfinance Act of 2006, and its subsequent amendments through the Microfinance (Amendment) Act of 2013, provided a legal framework to guide Microfinance Institutions (MFIs) in Kenya that wished to transform into regulated deposit-taking microfinance banks. This was expected to drive growth in the microfinance sector but by 2010, only three (3) MFIs had successfully transformed. Whereas evidence from other countries suggests planning as a major factor affecting the transformation of MFIs, the available information is not conclusive on the specific aspects of planning that affect transformation and the magnitude of the effect. This study, therefore, sought to determine the role of planning in the transformation of microfinance institutions into microfinance banks in Kenya. The specific objectives were to establish the effect of various aspects of planning on the transformation of microfinance institutions into microfinance banks in Kenya and to make recommendations for improving the level of success with transformations in future. The target population was 48 institutions that were members of the Association of Microfinance Institutions in Kenya as at 1st January 2013. The study selected 25 MFIs using purposive sampling. Four respondents, comprising of managers and/or board members, were then selected from each of the 25 MFIs using simple random sampling; thereby giving the survey a total sample of 100. A questionnaire was used to collect data. The Scientific Package for Social Sciences (SPSS) was used to aid in the entry, storage and analysis of data. The study used both descriptive and inferential statistical data analysis. First, descriptive data analysis was undertaken to establish the distribution of various data items using the mode. Inferential statistical analysis was then done to test for the existence and strength of relationship between the independent and dependent variables. This was done using the Pearson Chi-square Test for Independence, which is considered appropriate where the independent and dependent variables are categorical - as was the case in this study. Out of the five aspects of planning, the study established that only convincing the board and management on the need to transform was a significant challenge in the transformation of MFIs into microfinance banks in Kenya. Overall, the study found no significant association between planning and MFI transformation status in Kenya and concluded that planning was not a significant challenge. The study recommends that MFIs in Kenya wishing to transform should approach the process with confidence that planning activities will not pose any serious challenges. The study also recommends that MFIs in Kenya that wish to transform into microfinance banks should be prepared to spend time and other resources on educating the board and management way before presenting to them the proposal for transformation.