Strategic choices of survival within a changing environment: the case of Kenyan microfinance Institutions

Abstract

Microfinance institutions (MFIs) are now widely accepted around the world as critical players in poverty alleviation, but even more important is their role in bridging the gap between the formal and the informal financial markets. Microfinance seeks to promote an all inclusive financial sector through integration of the informal side, and down streaming the formal side. Even though there has been tremendous development within the microfinance sector especially in outreach and impact, the survival of many MFIs in the long term is under threat because the major source of funding (donors) is no longer a sure source as it was in the past. Because of this, Kenyan MFIs like their counter parts in Asia and Latin America are exploring possible options for long term survival. The study was therefore designed to establish the survival strategies being adopted by Kenyan MFIs and the reasons behind the choices made. The researcher in undertaking this study envisaged that it would be useful, not only for referencing, but also for informing various stakeholders. Research Methodology In carrying out the study, the researcher ad~~ed a census survey method because the number of clearly constituted MFIs as defined by Association of Microfinance institutions (AMFI) was/is fairly small. Besides this it was envisaged that given the creativity within the sector, a census would not only be widely representative, but validate drawn conclusions. Primary data collection was adopted because the size of population was small, but also there appeared to be limited publications on the matter of strategic choices of MFIs. A questionnaire was developed and distributed to all AMFI, (copy is annexed to this report).

Findings Even though the number of formal MFIs (18) is small, the coverage is extensive, reaching 64 out of the possible 67 administrative districts. The total outreach is still however low compared to the potential number of small and micro enterprises across the country. All the MFIs studied are ideally governed by legally constituted Boards, but these Boards have not strictly adhered to tenure of office, with some members having offered themselves for re-election several times. Though technically, there is nothing wrong with this, it may be interpreted to mean that the institutions are interested in maintaining the status quo as far as corporate governance is concerned. There has been a significant shift in funding, from donor to deposits (22%) and commercial debts (28%). Donor funding is still significant at 33%. Of the potential strategic choices open to MFIs, change in organizational structure was the most popular, being implemented by 91% of the institutions. Change in funding was the second most popular choice being implemented by 73% of the institutions. Change in, Management Information Systems was significant, being implemented by 64% of the in-s.titutions. Change in; services, client target and geographical coverage shared the same implementation priority levels (55%), the least practiced change was on Board and management. The factors that influenced choices made were mission, client needs, availability of resources. All the institutions (100%) stated that their choice of strategy was influenced by their mission. Secondly, clients needs had a significant impact on strategic choice according to 82% of the institutions. However the latter was not collaborated by the findings on changes effected, where only 55% of the institutions had made any changes on services offered. 64% of the institutions iii stated that availability of resources had a significant bearing on choice of strategy adopted. Other factors influencing adoption of strategy were; capacity of the institution (45%), government regulation (9%). Incidentally, no institution attributed any choice to donor requirement contrary to practice. From experience, donors have had a significant influence on some choices for specific institutions by attaching certain conditions to their funding. There were some noted constraints to choices made according to the institutions studied. One was the issue of rising costs with no matching revenues leading to a decrease in sustainability in the short run. Secondly poor forecasting led to low target achievement. In some cases the whole exercise led to retrenchment which resulted in low morale and productivity. Lastly, supervision of distant branches proved a daunting task in the absence of computerized systems. Despite all these constraints, all the institutions were affirmative that choices made had significantly improved overall performance especially in outreach. Conclusions From these findings, the main conclusions are that; Kenyan MFIs are aware and have so far remained sensitive to changes within their operating environment. They are however more comfortable choosing 0.,I.. adopting those strategies that build on institutional memory rather than those that will require investment in innovative procedures. For this reason the strategies tend to achieve results in the short term, and lack momentum in the long term. This is why even though outreach has improved significantly; the same cannot be said of sustainability. Product development is still not a priority for a majority of the Kenyan MFIs as evidenced by the small number of them making changes in that area. From the researcher's experience in the sector this can be attributed to various factors; lack

of resources, inadequate capacities or the fact that many of these institutions may be more supply than demand driven. Recommendations Given the findings and conclusions above, the study recommends that; Kenyan MFls should pay more attention to product development in order to remain competitive in the long term, and secondly frequently review their vision in order to align the direction with the emerging industry. Lastly MFls should focus on raising cheaper funds as opposed to commercial debts. For this to happen, they must be willing to make hard choices especially in areas of governance.