CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Microfinance offers promise for alleviating poverty by providing financial services to
people traditionally excluded from financial markets. Small-scale loans can relieve
capital constraints that might otherwise preclude cash-strapped entrepreneurs from
investing in profitable businesses, while savings services can create opportunities to
accumulate wealth in safe repositories and to manage risk through asset diversification.
While this promise of microfinance is widely touted, it is infrequently subject to careful
evaluation using detailed data (Osterloh et al, 2006)
Micro and Small enterprises form an integral part of the Kenyan society. In Kenya, the
MSEs are credited with creating 80% of all new jobs and have hence formed part of
government strategy in job creation, poverty eradication and economic growth (Sessional
Paper No.2 of 2005)
There are many players purportedly working to assist in the growth of MSEs from both
the public and private sector. The public sector has mainly non-profit oriented
organizations, which are funded by the government of Kenya or by the donor community
while on the other hand the private sector has both the non-profit and the for profit
institutions. The non-profit^ms^itutions are mainly NGOs most of which are religious and
philanthropic groups. The not- for profit players are few and far apart while compared to
the for profit institutions which have penetrated to most parts of Kenya including into
very remote areas. The For-profit institutions include Banks, Micro-finance institutions,
SACCOs, ROSCAs, merry-go-rounds, shy-locks among others. (Central Bank, 2007)
Microfinance refers to small-scale financial services such as cash loans, money transfers,
direct deposits, savings, and insurance made accessible primarily to the poor. Two
prominent features of successful microfinance institution building are group lending and
savings (Yaron, 1994).
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