Differentiation strategies used by microfinance institutions in Kenya

Abstract

Microfinance Institutions are pillars to development of small business and growth of the informal sector in Kenya. They are able to mitigate asymmetric information problems between lenders and borrowers hence increasing access to financial services for people with no traditional collateral hence leading to potential positive impacts on poverty reduction. However, success of MFIs is threatened by reduction in donor support and intense competition in the industry. Given the important role played by MFIs, they need to come up with strategies to face competition by enhancing their competitive advantages. Given that there IS no documented study on differentiation strategies employed by MFIs, it was important to conduct a study to determine the differentiation strategies. The objectives of the study were to determine the extent of use of differentiation strategies by MFIs in Kenya and to establish challenges MFIs face III differentiating their services. The research design was a descriptive survey. The population of interest in this study consisted of all the twenty-seven (27) MFIs in Kenya who were members of the Association of Microfinance Institutions (AMFI). Thus a census was conducted. Primary data was collected using a structured questionnaire, which was analysed using descriptive statistics- the mean, standard deviation, frequencies and percentages. From the study it was evident that MFIs have carried out augmented service, brand image, product or service, channel and personnel differentiation strategies. Customer orientation showed that the firms were found to understand the customers to a large extent. The perception of the firms on delivering value scored quite low represented by a very low or no extent. Responses indicated that firms were able to provide clients with extensive branch network as well as penetrating the market as a differentiation strategy only to some extent. Augmented service was applied to a large extent together with brand imaging and channel differentiation while for personnel differentiation firms applied to a large extent. Indications further point to the fact that the applications of differentiation strategies varied among the firms to a very large extent. Provision of quality service attracted respondents but many firms were not keen on first tracking loan processing and carrying out market research to understand customer needs. Most firms cited the cost of carrying out research as the main constraint in understanding customer needs. Further research is implied on the perception of other financial institutions and their reactions towards practising market differentiation and differentiation strategies especially those who are not members of AMFI.