Relationship between credit models used by microfinance institutions in Kenya and the attainment of outreach

Abstract

The main objective of this study is to fill the gap in the knowledge of what credit models Mfls in Kenya are using and what is the level of outreach achieved by these Mf'Is. Majority of the MFIs in Kenya use group-based lending to deliver financial services to their clients and only a few especially those run by commercial banks use individual lending approach. The group-based lenders are able to reach more people in low-income brackets because they rely on group guarantees as opposed to the individual lenders who mainly rely on tangible securities, which the poor can not afford. The clientele of Mfls is usually made up of women from densely populated urban areas, in low-income bracket. Voluntary savings are not common among the MfIs in Kenya. However, most of the Mfls do mobilise compulsory savings to act as insurance for the money rendered. Loan terms are short averaging about one year and the amount of loan advanced to clients are quite small with frequent repayment and high interest rates but the effects of interest rate on the number of borrowers is low. In conclusion, the Mf'Is that use group-based lending, group-guarantees, high frequency of repayment, relatively small loan size and short loan terms are able to achieve a greater scale of outreach and deeper depth of outreach than those using individual lending, tangible collaterals, low frequency of repayment, big loan sizes and long loan terms.