The Linkages Between Micro Finance Institutions (Mfis) and Commercial Banks in Kenya

Abstract

Over many years commercial banks have not been involved in provision of micro credit to the small and micro enterprises. The sector has remained the preserve of micro finance institutions (MFIs). Liberalization of the financial sector has increased level of competition; hence banks are looking for avenues to expand their revenue base. The presence of a large underserved as well as unserved market in the small and micro credit sector has provided the opportunity to the commercial banks to enlarge their revenue. This paper highlights ways in which the commercial banks have tried to link with the micro finance institutions so as to reach the small and micro enterprises in provision of funds. The paper observes that commercial banks lend directly to the micro finance institutions and indirectly to the small and micro enterprise through the MFIs. The study finds that the commercial banks also receive services from the micro finance institutions which include savings and deposit mobilization among others. The study finds that in establishing the linkage, commercial banks are faced by challenges like loan repayment and low interest rate unlike the micro finance institutions whose greatest challenge is geographical location of the small and micro enterprises. The study concludes that both categories of institutions are optimistic that there is high potential in lending to the small and micro credit sector therefore Association of Microfinance Institutions and commercial banks should establish a structure that will accommodate both financial and facilitating linkages.