EFFECT OF MICROFINANCE INSTITUTIONS ON

PERFORMANCE OF ENTREPRENEURSHIP IN KENYA: A CASE

OF BODABODA BUSINESS IN NAIROBI COUNTY

BY

GOK YANG RUATHDEL

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

FALL 2019

EFFECT OF MICROFINANCE INSTITUTIONS ON

PERFORMANCE OF ENTREPRENEURSHIP IN KENYA: A CASE

OF BODABODA BUSINESS IN NAIROBI COUNTY

BY

GOK YANG RUATHDEL

A Research Project Report Submitted to the Chandaria School of

Business in Partial Fulfillment of the Requirement for the Degree of

Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

FALL 2019

ii

STUDENT’S DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any

other college, institution, or university other than the United States International

University in Nairobi for academic credit.

Signed: ________________________ Date: ______________________

Gok Yang Ruathdel (653957)

This project has been presented for examination with my approval as the appointed

supervisor.

Signed: ________________________ Date: ______________________

Timothy Okech, PhD

Signed: ________________________ Date: ______________________

Dean, Chandaria School of Business

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DEDICATION

This project is dedicated to my family, and my kind heartily sponsor who open wide the

way of my dreams through his continuing support of my education. Also to my brother

Tut yang who selflessly provides my needs. To my dearest and lovely wife Nyamal Gach

Pal who usually rob her precious sleeping time waiting for me to making sure I reach

home safely from school. I also to my mother Elder Mary Nyachin Mut who constantly

help me in prayer for God to give me strength to finish my study. I dedicate this work to

you all my beloved family

iv

ACKNOWLEDGEMENT

With the best efforts I have taken on this project. It would not have been possible without

the kind support and guidance of several individual who immensely contributed to my

success. I would like to express my utmost thanks to all of them. First of all, I would like

to thanks the almighty father who the depth of both riches wisdoms and knowledge found

in Him. For giving me the opportunity, strength and health to work on my project.

I would like to express my special recognition to my dearest brother Tut Yang and my

sponsor David Leitch for their kind contribution toward my study that made me to the

completion of this project. Special thanks goes to United States International University

for giving me this rear Opportunity to undertake me Master in Business Administration in

this wonderful institution.

I would also like to give special thanks to my supportive supervisor Prof. Okech for his

excellent guidance and timely supervision, for giving me the best ideas and all the

information needed in my project. With his encouragement and support from the initial to

the end of my project has exposed me in to valuable ideas about the research and

understand more of the project. Lastly but not the lease, I offer my regard to all those who

supported me in any respect on my project work and as well as in the whole study of this

Master in Business Administration. Thanks you all!

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ABSTRACT

The general objective of this study was to determine the effect of microfinance banks on

the development of entrepreneurship in Kenya, the case of bodaboda business in Nairobi.

The study was guided by the following research objectives: to examine factors affecting

access to finance on performance of Bodaboda entrepreneurs in Roysambu and Safari

Park Area, to find out how lending policies of micro financial institution affects

performance of Bodaboda entrepreneurs in Roysambu and Safari Park Area; and to

determine the effect of capacity building of micro financial institution affects

performance of Bodaboda entrepreneurs in Roysambu, Safari Park, Githurai, Kahawa

and Kahawa West areas.

A descriptive research design was used because it helps the researcher find out the what,

who, where, when or how much. Target population used 169 bodaboda operators in

Royambu and Safari Park. Clustered random sampling was used and a quota of 30%

which was drawn from each strata thus, giving us a sample size of 48 respondents.

Questionnaires were used to collect data. Data was analyzed using descriptive statistics.

Pearson correlation and regression analysis was used to determine the influence of

independent variables on the dependent variable.

The findings on factors affecting access to finance and its effect on performance of

Bodaboda entrepreneurs revealed that majority of respondents agreed that they started

their business using their savings and they usually disclose information regarding their

business when applying for a loan. Respondents could however not reach an agreement

on due to lack of enough cash flow from their business they prefer taking loan from

friends and family. Respondents started their business using money from family.

Respondents also disagreed on they keep good business records that help them access

finance easily from micro financial institutions and they maintain proper financial record.

The findings on how lending policies of micro financial institution affects performance of

Bodaboda entrepreneurs showed that respondents agreed that due to lack of collateral

respondents get loans from other sources. Consider the amount of interest rates charged

before seeking finance. However, respondents could not reach an agreement on micro

financial intuitions transaction costs are usually higher, discouraged to apply for a loan

because they usually give them less money than what they requested, do not like to apply

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for loans due to complex application procedures and do not take loans due to short loan

repayment.

The findings on effect of capacity building of micro financial institution affects

performance of Bodaboda entrepreneurs. Respondent agreed that training has helped

them grow their business and sales. Through networking respondents were able to share

knowledge and learn new skills. However, respondents were not sure on training offered

by microfinance institutions to help them understand procedures that are related to loan

application, applying for a loan as a group is easy because respondents can get co

guarantors and keeping the right network has enabled respondents get access to. The

study also showed that respondent disagreed on they have a business plan that they can

use when applying for money from microfinance institutions.

The study concluded that a lot of entrepreneurs started their business using their savings

and they also disclose information regarding their business when applying for a loan.

Training has helped Bodaboda entrepreneurs grow their business and sales and it has also

helped them understand terms and conditions required before applying for a loan.

However, entrepreneurs prefer loans from friends and family due to lack of enough cash

flow. Respondents get loan form other financial institutions due to lack of collateral and

they also consider the amount of interest rate offered. Transaction costs are high. MFI’s

offer Short loan repayment period and respondents do not have a business plan that they

can use when applying for loans form microfinance institutions.

It was recommended that MFIs should conduct an awareness campaign to encourage

Bodaboda operators to save more. MFIs and government to come up with a strategy to

provide entrepreneurs with loans at a lower interest rate, reduce the transaction cost,

increase repayment period, make the application process user friendly and easy and

minimize penalty charged to businesses that are not able to repay their loans on time and

MFIs should offer entrepreneurs short courses.

The study only focused on effect of microfinance institutions on performance of

entrepreneurship in Kenya and it looked at factors affecting access to finance, lending

policy and capacity building. Very few studies have been done on capacity building

therefore, more studied should be done. In addition, research should also be done to

identify other factors that might affect performance of entrepreneurship in terms of access

to finance.

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TABLE OF CONTENTS

STUDENT’S DECLARATION ..................................................................................................... ii

DEDICATION ............................................................................................................................... iii

ACKNOWLEDGEMENT ............................................................................................................ iv

ABSTRACT .................................................................................................................................... v

TABLE OF CONTENTS ............................................................................................................. vii

LIST OF TABLES ......................................................................................................................... ix

LIST OF FIGUERS ........................................................................................................................ x

CHAPTER ONE ............................................................................................................................. 1

1.0 INTRODUCTION .................................................................................................................... 1

1.1 Background of the Study ......................................................................................................... 1

1.2 Statement of the Problem ........................................................................................................ 4

1.4 Specific Objectives .................................................................................................................... 5

1.6 The Scope of the Study ............................................................................................................. 6

1.7 Definition of Terms.................................................................................................................. 6

1.8 Chapter Summary .................................................................................................................... 7

CHAPTER TWO ............................................................................................................................ 8

2.0 LITERATURE REVIEW ........................................................................................................ 8

2.1 Introduction ............................................................................................................................. 8

2.2 Access to Finance and Performance of Bodaboda Entrepreneurs ....................................... 8

2.3 Lending Policy on Performance of Bodaboda Entrepreneurs ........................................... 12

2.4 Capacity Building on Performance of Bodaboda Entrepreneurs ...................................... 16

2.5 Chapter Summary .................................................................................................................. 21

CHAPTER THREE ..................................................................................................................... 22

3.0 RESEARCH METHODLOGY ............................................................................................. 22

3.1 Introduction ............................................................................................................................ 22

3.2 Research Design ...................................................................................................................... 22

3.3 Population and Sampling Design .......................................................................................... 22

3.4 Data Collection Methods ........................................................................................................ 24

3.5 Research Procedure................................................................................................................ 25

3.6 Chapter Summary .................................................................................................................. 25

CHAPTER FOUR ........................................................................................................................ 27

4.0 RESULTS AND FINDINGS .................................................................................................. 27

4.1 Introduction ............................................................................................................................ 27

viii

4.2 General Information .............................................................................................................. 27

4.3 Factors Affecting Access to Finance ..................................................................................... 30

4.4 Lending Policy and Performance of Entrepreneurs ........................................................... 34

4.5 Capacity Building and Performance of Entrepreneurs ...................................................... 38

4.6 Financial Performance ........................................................................................................... 42

4.7 Chapter Summary .................................................................................................................. 43

CHAPTER FIVE .......................................................................................................................... 44

5.0 SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATIONS ................ 44

5.1 Introduction ............................................................................................................................ 44

5.2 Summary ................................................................................................................................. 44

5.3 Discussion ................................................................................................................................ 46

5.4 Conclusions ............................................................................................................................. 52

5.5 Recommendations .................................................................................................................. 53

REFERENCES ............................................................................................................................. 55

APPENDIX I: QUESTIONNAIRE ............................................................................................. 68

APPENDIX II: NACOSTI CERTIFICATE .............................................................................. 72

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LIST OF TABLES

Table 3.1: Population Size ............................................................................................. 23

Table 3.2: Sample Size .................................................................................................. 24 Table 4.1: Response Rate .............................................................................................. 27

Table 4.2: Descriptive Statistics of Factors Affecting Access to Finance ....................... 32 Table 4.3: Correlation between Factors Affecting Access to Finance and Performance of

Entrepreneurs ................................................................................................................ 33

Table 4.4: Regression Analysis of Factors Affecting Access to Finance and Performance

of Entrepreneurs ............................................................................................................ 33

Table 4.5: Anova of Factors Affecting Access to Finance and Performance of

Entrepreneurs ................................................................................................................ 34

Table 4.6: Coefficients of Factors Affecting Access to Finance and Performance of

Entrepreneurs ................................................................................................................ 34

Table 4.7: Descriptive Statistics of Lending Policy ........................................................ 36

Table 4.8: Correlation between Lending Policy and Performance of Entrepreneurs ....... 37

Table 4.9: Regression Lending Policy and Performance of Entrepreneurs ...................... 37

Table 4.10: Anova of Lending Policy and Performance of Entrepreneurs ...................... 38

Table 4.11: Coefficients of Lending Policy and Performance of Entrepreneurs .............. 38

Table 4.12: Descriptive Statistics of Capacity Building ................................................. 40

Table 4.13: Correlation between Capacity Building and Performance of Entrepreneurs . 41

Table 4.14: Regression Analysis of Capacity Building and Performance of Entrepreneurs

...................................................................................................................................... 41

Table 4.15: Anova of Capacity Building and Performance of Entrepreneurship ............. 42

Table 4.16: Coefficients of Factors Affecting Access to Finance and Performance of

Entrepreneurship ........................................................................................................... 42

Table 4.17: Descriptive Statistics of Financial Performance ........................................... 43

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LIST OF FIGUERS

Figure 4.1: Age ............................................................................................................. 28

Figure 4.2: Gender......................................................................................................... 28

Figure 4.3: Marital Status .............................................................................................. 29

Figure 4.4: Highest Level of Education ......................................................................... 29

Figure 4.5: Years of Business Operation ........................................................................ 30

Figure 4.6 Finances you have accessed .......................................................................... 30

1

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

Microfinance is the process of providing financial services such as micro-credit, micro-

saving or micro-insurance to poor people. Ogunleye (2009) define Microfinance as small

scale financial services that involve mainly savings and credit services to the poor.

Microfinance is a financial institution that provides financial services to enterprenuers

who are not able to get banking and other associated services (Malach, Lerner &

Schwartz, 2010). In addition, entrepreneurs are able to get financial services through

relationship based banking and group-based models. Relationship based banking is

offered to individual entrepreneurs and small businesses and group-based models are

offered to a group of entrepreneurs and small businesses to apply for loan and other

services (Malach et al., 2010).

Microfinance institutions (MFIs) are institutions, registered to provide microfinance

services such as loans, domestic funds transfer and other financial services to micro,

small and medium enterprises to run and expand their business (Muogbo & Tomola,

2018). According to Kibas (2004), MFIs can be classified as Non-Governmental

Organizations (NGOs), Savings and Credit Co-operative (SACCOs), banks and

Community Based Organizations (CBOs). They provide financial services such as

savings, loans and insurance to enterprises in the form of micro credit. According to

World Bank (2010), there are around 900 microcredit institutions in 101 countries that

offer loans to the world’s poor. Some microfinance institution however are reluctant

offering their services to people in rural areas due to poor infrastructure, high risk and

high cost of operation (World Bank, 2010).

The main objective of microfinance institutions is to create a good environment for the

low income self-employed and near-poor households and provide them with an

opportunity to access credit, savings, insurance, and general banking services (Rukaria,

2015). MFIs are key players in entrepreneurship development; it is recommended that

microfinance institutions (MFIs) should package their services together (financial and

2

non-financial) in order to positively boost growth of Micro Small and Medium

Enterprises (MSMEs) (Kushoka, 2013). Akm (2016) states that there are around 742

NGOs in Bangladesh that are authorized to operate microcredit program. The NGOs are

involved in developing credit-based productive and income generating projects to

encourage women become entrepreneurs and provide access to supportive services

hence, reduce poverty in rural areas and empower women to start their own businesses.

However, Mallick (2002) indicated that microcredit institutions were created in rural

communities in Bangladesh to increase economic and social development. Moreover,

Bangladesh has around 20,000 NGOs, associations, credit groups and cooperatives.

Around 2116 NGOs offer microfinance to poor people living in rural areas at a lower cost

to improve borrowers’ economic conditions (Mazumder & Wencong, 2013). In

Netherlands, Chiyah and Forchu (2010) postulated that microfinance institutions offers

people new opportunities by enabling them to get and secure finance hence, give them an

opportunity to grow and increase their profits. It also increases economic and social

development by improving peoples living conditions. In a report by European

Commission (2013), access to finance was considered a key determinant for business

start-up, development and growth for enterprises. Enterprises have different needs and

faces different financial challenges as compared to large businesses.

In Africa, Sakthi (2011) found that 6% of Africans borrow money to start a business and

13% borrow to buy food. Moreover, 50% of the population live with less than 1US$ or

less per day and most Africans lack the understanding of what it would take to successful

entrepreneurs. Morover, they lack necessary technical management skills and confidence.

They also lack personal ambition and willingness for fear of sharing ownership and failed

to form partnership whereas, Oseph (2014) indicated that in Ethiopia, microfinance

institutions (MFIs) were developed to resolve credit access problem that entrepreneurs

face. Microfinance institutions were also developed to help people and business to

manage available assets on a continuous basis. In addition, access to financial services

allows existing businesses to grow and provides starting capital for businesses that are

starting. Furthermore, Abdel, Abdimajid and Ali (2013) suggested that in Mogadishu

microfinance institution should set flexible, affordable and attractive requirements in

financing small businesses thus, motivate entrepreneurs to borrow.

3

In Nigeria, Ojo (2009) noted that microfinance institutions play a big role in the financial

industry. It has a positive effect on individuals, business organization and other financial

institutions. Hala (2018) asserted that in Egypt microfinance institutions plays a big role

in the financial industry and it also has a positive effect on individuals, business, other

financial institutions, government and economy. However, in Mogadishu, a study done by

Yasin, (2013) established that requirement put in place by microfinance institutions

prevents them from borrowing money. In addition, most enterprises are not able to meet

the requirements set by the Microfinance institutions. Muogbo and Tomola (2018) also

noted that some of the challenges that micro-financing institutions are facing in Nigeria

includes; high operating cost, repayment problem, inadequate experienced credit staff,

and lack of re-financing facilities and internal control challenge.

In Kenya, Mwangi (2011) postulate that Microfinance movement started in the late 1980s

as a result of exclusion of large proportion of the population from the formal financial

institution such as banks. Microfinance was developed to fill the gap left by banks in

providing credit to individuals, micro, small and medium enterprises which were

growing during this period. In addition, in Kenya, Microfinance institutions were

developed by NGO or a Savings and Credit Cooperative Society Framework. MFIs are a

source of credit for low income households and enterprises in rural and urban areas of

Kenya (Wambugu & Ngugi. 2012). MFIs also gained reputation in Kenya because formal

banking sector saw informal sector as risky and not commercially viable Ogindo (2006).

Moreover, new, innovative and pro-poor methods of financing low-income households

and MSEs were developed by MFIs to encourage them to take finances. MFIs have also

greatly contributed to social-economic empowerment to the beneficiaries and their

dependents (Kamau, 2010).

Access to credit as start capital has grown especially to entrepreneurs in Kenya. However,

most small scale businesses lack adequate funds to grow and expand due to difficulties in

accessing credit facilities from financial institutions they provide a number of services

including book keeping, basic management, access to market and skills development

(Mokua, 2013). Mbithe (2013) established that financing offered by MFIs in Kenya helps

entrepreneur’s access loans and offers favorable interest hence create opportunities for

them to grow and expand. In addition, some of the obstacles that enterprises face include;

4

poor financial management skills, financial literacy and unable to document their business

operations and perform basic accounting

Bodaboda is a common means of transport used in Kenya. They are around 600,000

commercial motorcycles in Kenya (Bodaboda Safety Association of Kenya, 2019). The

industry grew significantly in 2008 due to the inability of Kenyan transport

system’s to fully meet the commuters’ transportation needs (Kumar & Barret, 2008).

In addition, the increase is attributed to the higher registration of motor and auto cycles as

a result of the zero rating of all motorcycles below 250 cc in 2008. Through this, the

Kenyan government was able to increase both rural and urban transport and create job

(Kenya National Bureau of Statistics, 2010). The industry has also contributed around

Sh219 Billion in revenue in the economy (Bodaboda Safety Association of Kenya, 2019).

Motorcycles function in areas where other modes of transport may not be available. They

serve as taxis and they are reliable and convenient irrespective of time, type of road,

distance or destination and in addition, they are readily available (Kumar & Barret, 2008).

1.2 Statement of the Problem

Microfinance is a source of financial services for startup entrepreneurs and small

businesses owners lacking access to banking services and other forms of financial credit.

Enterprises need financial and non-financial services. Sievers and Vanderbay (2004)

suggested that Microfinance has become major support in the sustenance and survival of

small enterprises in Kenya. Ojo (2009) in his study on impact of microfinance on

entrepreneurial development it was indicated that in Nigeria there was a significant

difference between the number of entrepreneurs who used microfinance institutions and

those who do not use them, there is a significant effect of microfinance institutions

activities in predicting entrepreneurial productivity; and that there is no significant effect

of microfinance institutions activities in predicting entrepreneurial development.

Omwono, Maizs and, Toroitich (2016) investigated the effect of microfinance services on

entrepreneurship development in Uasin-Gishu County Kenya. It was revealed that there

was a positive effect on entrepreneurship development.

Onyango (2011) conducted a research on the role of microfinance institutions in the

growth of small and medium enterprises (SMEs). A case of SMEs in Gikomba Market it

was revealed that microfinance institutions played an important role in the growth of

5

small medium enterprises by providing the following services seed capital, financial skills

training, role models and mobilization of savings. It was recommended that microfinance

institutions should play a larger role in the provision of seed capital which is mainly

provided by relatives. A lot of research has been done of microfinance and performance

but none has been done on Bodaboda operators. According to a study done by Kabahanga

(2013), it was recommended that there was need for a study to be done on effect of micro

finance institutions on performance of entrepreneurship in Kenya thus bridge a gap and

more knowledge that can be used for further study.

1.3 General Objective

The general objective of the study was to determine the effect of microfinance institutions

on performance of entrepreneurship by bodaboda operators in Roysambu, Safari Park,

Githurai, Kahawa and Kahawa West areas.

1.4 Specific Objectives

1.4.1 To examine factors affecting access to finance and its effect on performance of

Bodaboda entrepreneurs.

1.4.2 To find out how lending policies of micro financial institution affects performance

of Bodaboda entrepreneurs.

1.4.3 To determine the effect of capacity building of micro financial institution affects

performance of Bodaboda entrepreneurs.

1.5 Importance of the Study

The study was of importance to the following;

1.5.1 Government of Kenya

A national long-term development blueprint to create a globally competitive and

prosperous nation with a high quality of life by 2030, that aims to transform Kenya into a

newly industrializing, middle-income country providing a high quality of life to all its

citizens by 2030 in a clean and secure environment. This project will also highlight keys

section that contribute largely in poverty reduction inline the government vision for 2030

blue print goals therefore every sector that contribution a significant amount to the

6

economic need to be taken care of. It will educate the government on how to put attention

to promote this section of the economic.

1.5.3 Microfinancial Institutions

The Microfinance institution will understand the benefit of lending to the bodaboda

operators financial loan to continue expanding their businesses. Provide assistant to start

up their business in other sectors and makes more return back to the household as well as

national economic of the country.

1.5.4 Ministry of Transport

The minister of transport will be able to consider the operation of the bodaboda transport

to supplements the gap that already exists in the transport industry and provide clear

guidelines that will governance the bodaboda operation.

1.6 The Scope of the Study

The study sought to determine the effect of microfinance banks on the development of

entrepreneurship in Kenya. The study targeted 164 bodaboda operators located in

Roysambu and Safari Park area. The study was conducted in the month of September and

December 2019.

1.7 Definition of Terms

1.7.1 Entrepreneurship

Entrepreneurship is the process where individuals start and manage a business enterprise

in spite of obstacles they are going through to make profit (Kilby, 2012).

1.7.2 Microfinance

Microfinance is a financial institution that provides financial services to business that are

not able to get banking and other associated services (Malach et al., 2010).

1.7.3 Lending Policies

Lending policy is a statement of philosophy, standards, and guidelines that employees

must observe in granting or refusing a lending request (Munyiri, 2010).

7

1.7.4 Access to Credit

Access to credit is the ease of getting money or either personal use or business use

(Sakwa, 2017).

1.8 Chapter Summary

This chapter has discussed in details the background of the study, statement of the

problem, general objective and how the study was beneficial to other organizations. The

chapter has also outlined the scope of the study with the objective ofdetermining the

effect of microfinance banks on the development of entrepreneurship in Kenya. Chapter

two reviewed literature based on research objective under study and chapter three

analyzed research methodology that was used. Chapter four coved results and findings,

while chapter five provides the summary, discussion, conclusion and recommendations.

8

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter discusses literature review based on the following research objectives; to

examine the effect of access to credit on performance of Bodaboda entrepreneurs, to find

out how lending policies of micro financial institution affects performance of Bodaboda

entrepreneurs and to determine the effect of capacity building of micro financial

institution affects performance of Bodaboda entrepreneurs.

2.2 Access to Finance and Performance of Bodaboda Entrepreneurs

2.2.1 Size Firm

Size of a firm is how big or small a firm is in regards to the number of employees, capital

and also asset the firm has. According to a survey done on SME financing in Canada it

was revealed that the size of business irrespective of age has a strong influence on

financial structure (Sakwa, 2017). Self-employed businesses had the highest form of

informal financing, 37% use personal credit cards, 36% use their own personal savings

while 34% used commercial loans. This implies that small businesses depend on informal

financing such as business owner’s savings and personal credit facilities. But as firms

grow to medium size enterprises they start relaying on formal commercial instruments,

trade credit from suppliers and the resources of the business (Gichuki, 2012).

It is costly for smaller firms to resolve information asymmetries with debt providers.

Therefore, small firms will be offered less debt capital as compared to larger firms.

Transaction cost may also be higher. In addition, smaller firms are also not able to raise

capital because they are not able to reach capital markets due to their size (Cassar, 2004).

According to studies done by Kakuru (2013), claims that small and medium enterprises

face financial challenges as compared to large businesses. In addition, small firms are not

able to provide financial information, because it is owned and operated by the owner, they

have fewer assets and they lack legal requirement to regularly report financial information

and also lack audited financial accounts.

Older firms provide financial information which can be used by financial institutions to

determine their credit worthiness however, it is usually difficult and cost effective for

9

SME’s to access bank financing due to information asymmetry (Beal & Goyen, 2015).

According to Fatoki and Odeyemi (2010), studies have shown that demographic factors

such as; size, ownership type, age and sector influence the access to finance. Small firms

have more credit limitations as compared to large firms. Small firms are owned and

operated by private individuals who have no legal obligation to report financial

performance or to regularly audit their financial accounts. Small firms also have fewer

assets to provide as collateral and they are also linked with high failure rates as compared

to large firms (Pandula, 2011).

Smaller and younger entrepreneurs usually encounter higher cost of financing and are

also required to produce collateral however; smaller entrepreneurs have fewer assets to

offer as collateral (Berger & Udell, 2002). Zarook, Rahman and Khanam (2013) in their

study on the impact of demographic factors on accessing finance in Libya's SMEs. The

study revealed that there is a positive relationship between size of a firm and SMEs

access to finance. Essien and Chukwuemeka (2012) in their analysis on access to credit

markets and the performance of small scale agro-based enterprises in the Niger delta

region of Nigeria. Multistage sampling technique was used. Data was collected from 264

respondents. It was revealed that there was a positive and significant relationship between

access to finance and size of a firm.

According to a study done by Morobe (2015), on the effect of micro finance loans on the

financial performance of small and medium enterprises in Nairobi County. The study

used descriptive research. Total population was 5,596 SMEs. Stratified random sampling

technique was used to select a sample of 357 respondents. It was revealed that age of the

SME’s and credit accessibility affects performance of the SME. Oliveira and Fortunato

(2006) found that small firms face financial limitation which affects their growth and

development in the long run. Moreover, small firms are also not able to make use of

economies of scale as compared to large firms. This is because small firms do not have

sufficient cash flow and are not able to depend on bank financing but depends on their

own equity investment. Kira and Zhongzhi (2012) in their study on the impact of firm

characteristics in access of financing by small and medium-sized enterprises in Tanzania.

Findings showed that firm’s access to finance is affected by location, industry, age, size

and collateral.

10

2.2.2 Ownership Structure

SME’s are classified based on legal structure such as sole ownership; partnership and

proprietary. In Bhutan SMEs are classified based on the size of the initial cost of

investment of the firm and number of employees (Ministry of Economic Affairs & Asian

Development Bank, 2012). Onyango (2010) postulated that MSEs and SMEs are in the

same group as MSMEs. SME’s has 100 or less employees. They are also grouped into

sole-proprietorship, partnership or unlisted companies thus, making it hard for capital

markets and money markets to make investments. Firms’ sources of finance changes as

time go. Moreover, most firms usually start as family owned business and use their

savings and family finance. The business then grows and they start seeking for funds

from other Microfinance institutions. With time it becomes well established and starts

keeping good business records, developed accounting systems, establish a legal identity

and start seeking finance form financial institutions (Onyango, 2010).

According to a study done by Macharia (2012), on the effects of access to finance on

micro and small enterprises investment growth in Ongata Rongai Township. The study

found that in financing of the micro and small business, family and friends played a big

role in helping business owners to boost their operations with an average of 40% of the

finances coming from them, an average of 24% came from Microfinance institutions

while on average 30% of the finances were from business savings. Bello (2012) argued

that increasing access to saving is important because it helps the people who come from

poor areas that have not qualified for Microfinance services, to save with Microfinance

institutions thus, be able to access micro-credit and alleviate poverty.

A research done by Musamali and Tarus (2013) on does firm profile influence financial

access among small and medium enterprises in Kenya. Target population was 515 SMEs

in Eldoret Town. The study collected data from 203 respondents. The study revealed that

firm profile such as; business type, ownership structure; size of the firm and age of the

business influence SMEs’ access to finance. Charilaos (2017) examined ownership

structure and access to finance in developing countries, applied economics. The results

revealed that ownership structure is a significant predictor of firms’ access to finance.

Pierluigi and Valentina (2017) in their study on "family firms and access to credit. The

study revealed that family owned firms are more likely to experience difficulty accessing

credit from financial institutions.

11

2.2.3 Information Asymmetry

Information asymmetry is the process where one group of participants has better or

timelier information than other groups (Bushee & Leuz, 2005). Joseph (2013) noted that

financial characteristics such as business registration, accurate documentation of

transaction and financial activities as well as good business planning have a positive

correlation with credit accessibility. Schayek (2011) claim that most SME’s

owners/managers are very sensitive about disclosing information relating to their firm’s

financial performance. According to Mazanai and Fatoki (2012), start-up SMEs are

usually affected by information asymmetry problems because information is usually

inadequate and not transparent. New SMEs are also unwilling to provide full information

about their business therefore, limiting them from accessing finance from financial

institutions.

Entrepreneurs are more likely to be affected by information asymmetry problems.

Moreover, information asymmetries are common in new and technology-based

propositions. It occurs when manufacturing or technology based firms, are reluctant to

provide full information because they fear that disclosure may make it easier for their

competitors to exploit (Deakinset, North, Baldock & Whittam, 2008). Aunga (2017) in

their study on challenges facing small scale entrepreneurs in accessing loan from banks at

Ngongongare, Meru District, Arusha Region in Tanzania. It was revealed that lack of

adequate accounting information is one of the challenges that small scale entrepreneurs

are facing while accessing loans from financial institutions.

Entrepreneurs are facing a challenge to access finance from financial institutions due to

lack of sufficient information that is needed and transparency hence, hindering their

growth and development (Canton, Grilo, Monteagudo & Van der Zwan, 2013). Beck,

BeckDemirgüç-Kunt and Singer (2013) in their study on is small beautiful? Financial

structure, size and access to finance it was revealed that information asymmetry is caused

by poor accounting records, lack of audited financial statements and inadequate access to

SMEs information from credit bureaus. Cheng, Ya and Zhifei (2014) conducted an

analysis on financing difficulties for SMEs due to asymmetric information. Findings

revealed that access to finance is affected by information asymmetry.

12

In a study done by Gichure (2016) on financial market failure constraints and access to

finance by small and medium enterprises in Kenya. The study used correlation and

descriptive design. Target population was 120,000 SMEs. Purposive, stratified and simple

random sampling were used to select 384 SME. The study revealed that the SMEs faced

challenges in accessing finance due to information asymmetry. Nanyondo, Kamukama,

Nkundabanyanga and Tauringana (2014) examined quality of financial statements,

information asymmetry, perceived risk and access to finance by Ugandan SMEs. It was

established that there was a significant and positive relationship between quality of

financial statements and access to finance and a significant and negative relationship

between information asymmetry and access to finance.

2.3 Lending Policy on Performance of Bodaboda Entrepreneurs

2.3.1 Collateral

Collateral is the degree to which assets are committed by borrowers to a lender as a

security so that they can pay their debt (Gitman, 2003). The assets used as security are

used to recover the principle a borrower is not able to pay back the loan he or she

borrowed. Entrepreneurs offer security such as houses, their businesses, car, and anything

that can be sold and recover the money borrowed (Garrett, 2009). Hongbo Duan, Xiaojie

and Hongbo (2009) postulated that due to lack of collateral and guarantees the

entrepreneurs in China find it difficult to access loan from financial institutions thus

preventing them from contributing in the economic development of the country. Haron,

Said, Jayaraman, and Ismail (2013) noted in Malaysia collateral affects enterprise access

to finance.

A lot of micro finance institutions are considering to start providing financial services to

low income clients, women entrepreneurs and the self-employed who not able to access

banking and other services. Moreover, the ability to offer credit facilities to customers by

lending institutions was determined by the value of collateral, credit repayment records,

interest rates and the amount of savings customer have (Lumumba, 2016). Abdinor

(2013) investigated the effect of microfinance institution lending on the growth of small

and medium enterprise in Somalia. Descriptive design was used. Probability sampling

and stratified random sampling techniques were used to select a sample of 60 SMEs. It

13

was revealed that only a small percentage of SMEs in Somalia are beneficiaries of the

MFI lending services thus, having an effect on their growth. It was also revealed that

most SME’s do not have collateral thus, end up seeking for finance from cheaper sources.

It was recommended that the government and other financial institutions should ease the

accessibility of credit in small and medium enterprises to the microfinance institutions

and minimize the collateral conditions. SMEs should also be encouraged to use group

financing so as to minimize loan defaulting.

According to a study done by Kimaiyo (2016), on factors limiting small and medium

enterprises access to credit in Uasin Gishu County, Kenya. Target population was 10,200

SMEs. Descriptive research was used. The study sampled 392 SMEs. It was concluded

that most SMEs did not apply for credit due to complex application procedures, high

interest rate, and insufficient collateral and poor record keeping. Omondi and Jagongo

(2018) suggested that lack of access to credit is a major factor that prevents the growth of

entrepreneurial sector. It limits entrepreneurs from gaining financial services due to lack

of tangible security combined with inappropriate legal and regulatory framework that

does not recognize innovative strategies for lending to entrepreneurs. Adomako-Ansah

and Kwabena (2012) argues that before SME’s access credit form micro financial

institutions they are required to meet certain qualifications such as; collateral security,

financial performance, audited financial statements, credit history, recommendation from

risk managers, business registration documents, entrepreneurial experience and age of

firm.

Due to high collateral requirements, unfavorable interest rates and untimely delivery of

credit are factors that makes SMEs reluctant to obtain loans. Additionally, access to credit

by SME’s has reduced because micro financial institutions have failed to increase SME’s

loans due to lack of information, high transaction costs, large number of borrowers and

low returns from investments (Olutunla & Obamuyi, 2008). Gitonga (2012) in her study

on Microcrediting for low income earners. It was established that entrepreneurs need to

be educated on micro-crediting program and show different business opportunities to

venture into. Additionally, entrepreneurs have suffered lack of access to credit as a result

of not having collateral.

14

2.3.2 Repayment Policy

The amount of debt determines repayment requirements when enterprises are given loans.

In addition, entrepreneurs usually find is a challenge to repay big loans. Efficient loan

size fit borrowers’ repayment capacity and stimulate enterprise. If the amount of loan

given to entrepreneurs is sufficient for the purposes intended, it has a positive impact on

the borrower’s capacity to repay (Chong, 2010). Bragg (2010) postulated that the short

time frame given to entrepreneurs to repay their loans reduces the risk of non-repayment

to the bank, which will make the business’s fortunes will not decline so far within such a

short time period that it cannot repay the loan, while the bank will also be protected from

long-term variations in the interest rate”.

Pius (2010) in her study on influence of microcredit finance on the growth of small scale

women entrepreneurs in Kenya. It was indicated that repayment period affected the cash

flow into the business. Yusuf (2014) examined the effect of microfinance on small scale

enterprise in Osun State, Nigeria. Total population was 120 respondents. Data was

collected from 105 respondents. It was established that business turnover is affected by

loan repayment period, family size, and experience in business were the key determinants

of business turnover. In addition, volume of credit available to SMES’s is affected by the

repayment period and number of sourced.

Base on a study done by Frimpong (2014) on the effect of demand-side factors on access

to external finance by micro, small and medium manufacturing enterprises in Kumasi

Metropolis, Ghana. Target population was 4400 MSMMEs. Some of the challenge that

MSMMEs faces when accessing finance includes size of the firm, educational

background and work experience and financial management practices such as preparation

and use of financial information, business plan and capital budgeting. It is suggested that

SMEs should include good financial management practices such as preparation and usage

of financial information in their operations. It is also important for entrepreneurs to

include business plans in their operations as this will positively affect their access to

external finance. Mathenge (2011) examine the effect of micro finance institutions

services on the financial performance of micro and small enterprises in India Division. It

was revealed that accessibility and repayment of loans affects financial performance of

MSEs positively.

15

Loans given to entrepreneurs by financial institutions usually have short repayment

periods which prevent entrepreneurs from accessing loans (Abereijo & Fayomi, 2005).

Aunga (2017) investigated challenges facing small scale entrepreneurs in accessing loan

from banks at Ngongongare, Meru District, Arusha Region in Tanzania. Total population

was 420 SME’s. 100 respondents were sampled. Questionnaires were used to collect

primary data. It was revealed that transaction costs were found to be high and interest rate

was also found to be high consequently discouraging SME’s from applying for loan.

Moulson (2015) revealed that the payment period is a challenge that entrepreneur’s faces

when accessing loan from financial institutions. At times, loans received are less than

requested and short periods are giving for the repayment of the loan. Abdinor (2013)

investigated the effect of microfinance institution lending on the growth of small and

medium enterprise in Somalia. Descriptive research design was used. Stratified random

sampling was used to select 60 SMEs. The study revealed that challenges causing low

acceptance of loans include; long time taken to process loans, strict repayment terms and

high transaction costs.

2.2.3 Interest Rate

Group lending is the provision of small credit to the poor. It is used by microfinance that

provides loans without collateral. Interest charge is usually lower than interest charged to

individuals who want to access credit (Natarajan, 2004). High lending rates affect

business because they influence both their own direct costs and the ability of their

customers to borrow and spend (Bramuel, 2013). Aunga (2017) stated that loans from

Kenyan microfinance institutions are usually limited in amount, have no grace period, are

short term and have very high interest rates. Additionally, studies have shown that loans

to SMEs only satisfy a fraction of their financial needs.

According to a research done by Abdi and Gikandi (2016), on effects of interest rate on

credit access of small and medium enterprises in Garissa County. Descriptive survey was

employed. Target population was 10 SACCOs and 150 SMEs registered within Garissa

County. It was concluded that SACCO’s interest rate policy affect SMEs accessibility to

credit. It was suggested that SACCO’s should consider revising their policy on interest

rate charged and the county government should intervene to ensure that SMEs have

access to financial services to enable them contribute to development and employment

16

creation. However, a study done by Muthoka (2012) on effect of microfinance on

financial sustainability of small and medium enterprises in Nairobi. The study revealed

that SMEs prefer loans from microfinance institutions, and they seek financial assistance

from the MFIs due to interest rate, easy loan repayment and amount offered.

Based on a study done by Bawuah, Yakubu and Alhassan (2014) on the effects of interest

rate on micro, small and medium enterprises financing decision in Wa Municipality of

Ghana. Multiple research and descriptive survey were used. Data was collected form 200

respondents. Findings revealed that interest rate affects choice of financing decision

SMEs make. Wakaba (2014) examined the effect of microfinance credit on the financial

performance of small and medium enterprises in Kiambu County, Kenya. Survey design

was employed. Total population was 2,061 SMEs. Simple randomly was used to select a

sample of 60 registered SMEs. It was concluded that enterprises benefit from loans from

microfinance institutions, the SMEs seek financial assistance from the MFIs due to

interest rate and easy loan repayment and amount offered.

In his Bett (2013) conducted a study on factors influencing growth of small scale

businesses in Bomet Constituency. It was indicated that SMEs are facing a challenge

accessing credit because of availability of fewer micro financial institutions. Majority of

SME’s are afraid of applying for credit due to high interest rates and lack of information

on availability of more affordable services that are being offered. Aunga (2017)

investigated challenges facing small scale entrepreneurs in accessing loan from banks at

Ngongongare, Meru District, Arusha Region in Tanzania. Total population was 420

SME’s. 100 respondents were sampled. Questionnaires were used to collect primary data.

It was recommended that banks and other financial institutions should lower their interest

rates and also grant loans on business asset and income as collateral securities.

2.4 Capacity Building on Performance of Bodaboda Entrepreneurs

2.4.1 Education

According to a study done by Frimpong (2014) on the effect of demand-side factors on

access to external finance by micro, small and medium manufacturing enterprises in

Kumasi Metropolis, Ghana. Target population was 4400 MSMMEs. Data was collected

from 440 MSMMEs. Explanatory research design was used. It was revealed that

17

education and experience of the entrepreneur has a significantly impact on access to

external finance. It was suggested that short courses should be created to help MSMMEs

practice of financial management especially those with lower educational background as

education is an important factor in accessing external finance. Karajkov (2009) noted that

lack of awareness, education and lack of interest by enterprises constitute the demand-

side factors which contribute to the current situation with regard to access to risk finance.

A survey done by Growth Fin (2008) revealed that inadequate and lack of knowledge on

available options of finance may limit entrepreneur’s access to external finance. Usually,

entrepreneurs are not aware of the kind of money they need and what the alternatives are

to raise capital. Irwin and Scott (2010) in their study on barriers faced by SMEs in raising

bank finance. It was established that educated entrepreneurs have the ability to present

positive financial information and strong business plans and they also have the ability to

maintain a better relationship with financial institutions compared to less educated

entrepreneurs. Fatoki and Smit (2011) found that education and work experience has a

positive effect on loan approval. Kumar and Francisco (2005) in their study they found

education has a strong effect on access to financial services in Brazil.

According to a study done by Owuor (2015), on the effect of microfinance services on the

growth of women owned small and medium enterprises in Ruiru Sub-County. Total

population was 467 women owned SMEs in Ruiru Sub County. Simple random sampling

was used to select a sample of 47 SMEs. Questionnaires were used to collect data. It was

revealed that there was a weak correlation between training and growth of women owned

SMEs in Ruiru sub county and business training services were offered to a very small

extent, SMEs did not attend the training regular and implementation advisory services did

not do a follow up during training and after training. Donkor (2012) argued that one of

the major challenges that entrepreneurs face is lack of financial literacy. This affects

entrepreneur’s ability to access finance from financial institutions. Some entrepreneurs

are not able to understand the terms and conditions required before applying for a loan

and are usually reluctant when repayment period tend to be longer than expected. Some

financial institutions take advantage of their illiteracy and refuse to give them more

information and explain interest rate and its implication on the loan that they are about to

take.

18

Entrepreneurs from rural areas are not able to understand services offered by micro

financial institutions they also lack understanding of loan procedures. Moreover, lack of

information and knowledge makes entrepreneurs have a weak bargaining power in terms

of interest paid, asset and liability disclosure, misuse of loan funds and generally

bad preparedness (Bbenkele, 2007). Olomi, Mori, and Urassa (2008) noted that SME’s

faces a challenge accessing finance due to lack of knowledge of available finance

services, credit history and skills. According to King and McGrath (2012), the growth of

entrepreneurs is greatly affected by education. Entrepreneurs who have large stocks of

human capital in terms of education and vocational training are able to easily adapt to

changes that are taking place in the environment.

2.4.2 Training

According to Shane (2003), entrepreneurial process is a vital source of human capital and

also plays an important role in providing learning opportunity for individuals to improve

their skills, attitudes and ability. However, women entrepreneurs in developing countries,

lack training and. Micro finance service should offer entrepreneurs training because it

will help entrepreneurs gain skills and experience needed for business (Akanji, 2006).

Hassan, Chin, Yeow and Rom (2011) proposed that some microfinance institutions offer

training opportunities to micro-entrepreneurs so that they can understand procedures that

are related to loan application. Kimanzi (2016) studied the influence of micro finance

services on growth of women owned enterprises in Kitui Central Sub-County. Target

population was 230 respondents. Structured questionnaires were used to collect primary

data. It was recommended that leaders in women enterprises should be trained and given

advice on investment opportunities.

According to a study done by Rono (2018), on micro-credit and its relationship to the

growth of small and medium enterprises in Konoin Subcounty, Kenya. Descriptive

research design was used. Target population was 60 retail outlets. Questionnaires were

used to collect data. It was recommended that SMEs should be trained on how to use

financial management systems in their business thus increase efficiency and effectiveness

in tracking financial transactions. Financial institutions should also take part in

mentorship programs where SMEs should be introduced to professional marketers and

business development in order to ensure growth of their enterprises. Zindiye (2008)

19

claims that SME’s are usually unwilling to take part on training programs that requires

them to finance the costs because they are usually not able to learn how to manage case,

develop market and financial strategies. Micro financial instruction should therefore

develop training programs that are free and teach SME’s financial management skills,

book keeping, preparing financial statements, debit/credit control, budgeting and tax

calculation to ensure their growth.

Studies have revealed that lack of training is one of the challenges that entrepreneurs are

facing when accessing microfinance. Entrepreneurs lack training on how to generate

profit from microfinance institution thus, making them fail to manage the loan (Ashe,

Treanor & Mahmood, 2011). Kisaka and Mwewa (2014) investigated effects of Micro-

credit, Micro-savings and training on the growth of small and medium enterprises in

Machakos County in Kenya. A survey research design was used. Data was collected from

100 respondents. Questionnaires were used to collect data. Finding revealed that micro-

credit, micro-savings and training have a positive effect to SMEs growth. However, the

effect of training is not statistically significant because training is not based on the real

needs of SMEs. Nyabwanga (2013) claims that most entrepreneurs have basic education

and over 57% of these business operators do not attend any financial training

programmes. In addition, over 60% of them had little or no knowledge in business

management hence, lacking management skills.

In a study done by Chege (2013) on influence of capacity building on financial

performance and growth of women owned small and medium enterprises in Gikomba

Market. The study concluded that a lot of women owned SME’s have not gone through

training and development. It was suggested that SME’s should be offered training and

development opportunity because it will them increase their financial performance and

growth. Madole (2013) in his study on impact of microfinance credit on the performance

of SMEs in Tanzania: A case study of national microfinance bank- Morogoro. A case

study was used. Simple random and purposive sampling techniques were used to select a

sample of 80 customers. Findings revealed that age or experience of the SME’s owners

and credit accessibility has a positive influence on access to credit and SME’s should be

trained on ways to make investment decision or increase their profits.

20

Some financial institutions offer their clients training opportunities that help

entrepreneurs understand how to keep records and understand their business operations.

Through training, entrepreneurs are able to learn more skills, change their attitude on how

they perceive and conduct business activities and increase their firm performance. A

financially literate entrepreneur is also able to make better decisions on how to use other

financial services, save more and mitigate risk through use of insurance services (Andoh

& Nunoo, (2011).

2.4.3 Networking Skills

Networking is an activity where entrepreneurs build and manage personal relationships

with other businesses and financial institutions in their surrounding (Aarakit &

Kimbugwe, 2015). According to Mano (2014), networking is the creation of formal

relationships where participants share information. Networking is the process of building

long-term relationships with an aim of exchanging information and resources (Lama &

Shrestha, 2011). Chua, Chrisman, Kellermanns and Wu, (2011) contend that a lot of

SME’s are usually too small and do not have resources to make use of networking to

access debt financing. Sungur (2015) argued that if networking is well used it will

increase entrepreneur’s financial performance and market share. It will also help

entrepreneurs identify new opportunities, share knowledge and skills and reduce their

level of uncertainty surrounding the operation of the organization.

According to Ngoc and Nguyen (2009), networking will help entrepreneurs to access

external finance, gain more knowledge and skills and get support they need for

microfinance institutions. Coulthard and Loos (2007) noted that through networking,

entrepreneurs are able to build and manage a personal relationship with organization and

people from different backgrounds. Networking helps SME’s concentrate on its core

business, learn new skills and adapt to technological changes that are taking place in the

environment (Chittithaworn, Islam, Keawchana & Yusuf, 2011). Heshmati (2013) adds

that networking can also help organizations learn suitable business activities and increase

their ability to access finance from microfinance activities.

According to a study done by Tafadzwa and Olawale (2013), on the impact of networking

on access to debt finance and performance of small and medium enterprises in South

Africa. The study revealed that there is a significant and positive relationship between

21

networking and access to debt finance and performance of SMEs. Katambo (2016)

investigated the effect of networking on performance of small and medium sized audit

firms in Nairobi. It was established that performance is influenced by network diversity,

network size and network platform. Gunto and Alias (2014) conducted a research on the

impact of networking on the SMEs’ ability to access financial government support in

Malaysia. It was established that there is a positive and significant relationship between

networking and access to finance.

2.5 Chapter Summary

This chapter has reviewed literature based on the following study research objectives;

challenges, lending policies and demographic factors. The next chapter covered research

design, population and sampling design, data collection methods, research procedures and

the various data analysis methods. This is followed by results and findings in chapter

four, while chapter five provides summary, discussion, conclusion and recommendations.

22

CHAPTER THREE

3.0 RESEARCH METHODLOGY

3.1 Introduction

This chapter deals with steps that should be taken in order to obtain data from the fields.

It discusses method and procedures that were followed to undertake the research. It

covers research design to be used; the population, sampling frame, sampling technique

and sample size; the data collection methods, research procedures and data analysis

methods.

3.2 Research Design

Research design is a framework used to collect and examine data to answer research

questions under study and provide justification for choice of source of data, collection

methods and methods of data analysis (Saunders, Lewis & Thornhill, 2016). The study

used descriptive research design. This study used a descriptive research design.

Descriptive research is appropriate for this study because it helped a researcher gather

information and make summary of present and interpret data for clarification (Orodho,

2003). It helped the researcher collect data that can be described, described, grouped or

summarized in a way that makes sense. The use of descriptive research also helped the

researcher identify attributes of a particular situation based on observation made

(Williams, 2007). The use of descriptive research also helped the researcher describe

characteristics of certain groups, estimate the total number of people who have certain

characteristics and make predictions (Churchill & Iacobucci, 2018).

3.3 Population and Sampling Design

3.3.1 Population

Target population is a complete listing of all the elements under study (Cooper &

Schindler, 2014). Population is individuals, events or objects having a common

observable characteristic (Mugenda & Mugenda, 2003). The target population for this

study was 164 bodaboda operators located in Roysambu, Safari Park, Githurai, Kahawa

and Kahawa West areas.

.

23

Table 3.1: Population Size

Variable Population Percentage (%)

Safari Park 15 9

Githurai 52 32

Kahawa 35 21

Kahawa West 25 15

Roysambu 37 23

Total 164 100

Sorce: Boda Boda Safety Association of Kenya data base, (2019)

3.3.2 Sampling Design

3.3.2.1 Sampling Frame

Sampling frame is a list of all things where sample was drawn (Saunders, Lewis &

Thornhill, 2012). Cooper and Schindler (2012) defines sample frame is a list of all

elements in a population that a researcher was used to draw a sample from. Sample frame

is the selection of certain members of the total population that are to be examined in a

research (Bailey, 2008). The sample frame for this study consisted of 164 bodaboda

operators located in Roysambu and Safari Park areas. This information was obtained from

BodaBoda Safety Association of Kenya data base (2019).

3.3.2.2 Sampling Technique

The study used clustered random sampling. The target population was divided into a

cluster based on geographical location and data was collected for each location. Clustered

random sampling is the process where sample is drawn from elements in a population that

are geographically dispersed and possibly unable to access at the same time (Rahi, 2017).

Clustered random sampling is the process of selecting a sample randomly from each

cluster (Krathwohl, 2009). The use of clustered random sampling helps a researcher

reduce unbiased by ensuring that each element in the population is given an equal chance

of being selected (Bluman, 2007).

3.3.2.3 Sample Size

A sample size is a smaller group or sub-group gotten from the total population (Mugenda

& Mugenda, 1999). Sample size is the collection of a subset of objects, units or things

within a population to gain knowledge about the total population to make predictions

24

based on statistical inference (Thietart, 2001). Guided by the rule of thumb, the study

used clustered random sampling and a quota of 30% which was drawn from each strata.

Table 3.2: Sample Size

Variable Population Sampling ratio Sampling Size

Safari Park 15 0.3 5

Githurai 52 0.3 16

Kahawa 35 0.3 11

Kahawa West 25 0.3 6

Roysambu 37 0.3 11

Total 164 100 48

3.4 Data Collection Methods

Data collection is the process of gathering and assessing information based on sample

under study in a systematic way. It helps a researcher answer relevant questions and

evaluate outcomes (Cooper & Schindler, 2008). The study used primary data because

they are accurate, researcher was able to get up-to-date information and it is usually

unbiased. Primary data is raw data that has been collected directly from the field it can

also be qualitative or quantitative in nature. According to Struwig and Stead (2001),

qualitative data are information expressed in the form of “words, pictures, drawings,

paintings, photographs, films, videotapes, music and sound tracks” and are also expressed

in numbers. In addition, primary data was collected using closed ended questionnaires.

Closed ended questionnaires will be used to collect data because they are easy to analyze,

able to compare answers from different respondents and clarify any questions that

respondents might have. According to Kothari (2004), questionnaire is one of the most

common data collection tools used in research. Questionnaires are used to gather data on

current conditions, practices, opinions and attitudes in a quick and precise way (Orodho,

2008). In addition, use of questionnaires is usually cheap and less time consuming.

The questionnaire had a five point likert scale where; 5= strongly agree, 4=agree,

3=neutral, 2=disagree and 1= strongly disagree. The questionnaire was divided into five

sections. Section one has demographic information. Section two contained questions on

factors affecting access to finance. Section three has questions on lending policies.

25

Section four has questions on capacity building and section five has questions on

financial performance.

3.5 Research Procedure

A pilot study was done to identify any weakness in the research design (Cooper and

Schindler, 2013). Therefore, ten questionnaires were used to conduct a pilot study.

According to Mugenda and Magenda (2003), a pilot study with a sample of a tenth

of the total sample with homogenous characteristics is appropriate for the pilot

study. Information collected after the pilot study was used to polish and modify the

questionnaire thus, determine reliability. Pilot testing is an important step in research

process because it reveals vague questions and unclear instructions in the instruments. It

also captures important comments and suggestions from the respondents that enable the

researcher to improve on the efficiency of research instrument. To be able to collect data,

NACOSTI and a letter from United States International University obtained from the

university to help the research collect data. Questionnaires were self-administered.

Through this, a researcher was able to develop a relationship with the respondents,

answer questions that respondents might have and ensure that questionnaires are returned.

Gall, Gall, & Borg (2007) argued “that a self-administered questionnaire is the only way

to prompt self-report on peoples’ opinion, attitudes, beliefs and values. Due to

researcher’s lack of time to collect data a researcher was hired to collect and respondents

were assured that information collected was treated confidential and was only be used for

academic research.

3.6 Data Analysis Methods

Mugenda and Mugenda (2003) stated that data analysis is the process of bringing order,

structure and meaning to the information collected. Descriptive research was used. Data

collected was coded and analyzed based on variables under study. Statistical Package for

Social Sciences (SPSS) software was used to analyze the data. Pearson correlation and

regression analysis was used to determine the influence of independent variables on the

dependent variable. Descriptive statistics such as frequencies, mean, standard deviation,

correlation, ANOVA and regression analysis were used to present data.

3.6 Chapter Summary

This chapter explains research methodologies that were used. In addition, a pilot study

was also done to determine the reliability of the questionnaire and primary data was

26

collected using questionnaire and a Pearson correlation was also done to determine

reliability of variables under study. Chapter four covers results and findings, while

chapter five provides summary, discussion, conclusion and recommendations.

.

27

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction

This chapter covers results and findings of the study. It has presented results on

demographic factors, factors affecting access to finance, lending policy and capacity

building. Results on the study variables were presented using descriptive statistics.

4.2 General Information

4.2.1 Response Rate

The study issued 48 questionnaires but only 43 were filled and collected and 5

questionnaires were not answered. This gives a response rate of 90% as shown in Table

4.1.

Table 4.1: Response Rate

Questionnaires Number Percentage

Filled and collected 43 90

Non Responded 5 10

Total 48 100

4.2.2 Respondents’ Background

This section presents results on demographic factors of the respondents who participated

in the study.

4.2.2.1 Age of Respondents

To examine age of the respondent’s it was established that 40% of the respondents were

between age group 25-30 years. It was also revealed that 37% of the respondents were

between age group 31-39 and 23% were 40 years and above. Results are shown in Figure

4.1.

28

Figure 4.1: Age of Respondents

4.2.2.2 Gender of Respondents

To study gender of the respondent’s results revealed that 79% of the respondents were

male and 21% of the respondents were female. Results are shown in Figure 4.2.

Figure 4.2: Gender of Respondents

4.2.2.3 Marital Status

To investigate marital status results showed that 30 of the respondents are marred this

accounts for 70% of the total population, 6 responded were divorced accounting for 14%

of the respondents, 4 respondents were single accounting for 9% of the total population

and 3 respondents were widowed accounting for 7% of the total population. Results are

shown in Figure 4.3.

29

Figure 4.3: Marital Status

4.2.2.4 Highest Level of Education

Respondents were asked to state their highest level of education and 15 respondents

stated that they have secondary education this represents 35% population, 13 respondents

stated that they have a certificate this represents 30% the population, 8 respondents have

diploma this represents 19% of the population, 6 respondents have primary education this

represents 14% of the population and 1 respondent have a degree this represents 2% of

the population. As shown in Figure 4.4.

Figure 4.4: Highest Level of Education

4.2.2.5 Years of Business Operation

The results in Figure 4.5 show that 19 respondents stated that they have had the business

for 3-5 years representing 44% of the population, 13 respondents revealed that the

business has been operating for 6-8 years this represents 30% of the population, 6

respondents answered they have running the business for 0-2 years this represents 14% of

30

the population and 5 respondents noted that they have been running the business for more

than 9 years this represents 12% of the population..

Figure 4.5: Years of Business Operation

4.2.2.6 Finances Accessed

To investigate finances respondents have accessed, results revealed that 35% of

respondents have gotten loan from Sacco, 23% from personal savings, 16% have gotten

loan from family, 14% from more two sources, and 5% have gotten loan from friends. As

shown in Figure 4.6.

Figure 4.6 Finances you have accessed

4.3 Factors Affecting Access to Finance

The first objective sought to examine factors affecting access to finance and its effect on

performance of Bodaboda entrepreneurs in Roysambu and Safari Park. Five point Likert

Scale was used. Respondents were supposed to answer the questions where; 5= Strongly

31

Agree 2- Agree, 3= Neutral, 4 =Disagree, 1= Strongly Disagree. In the sub-section, both

descriptive and inferential statistics are provided with regard to access to finance.

4.3.1 Descriptive Statistics of Factors Affecting Access to Finance

It was determined that majority of respondents agreed that they started they started their

business using their savings had the highest mean of 3.48 and standard deviation of 1.110

and respondents usually disclose information regarding their business when applying for

a loan had a mean of 3.47 and standard deviation of 1.202. However respondents could

not reach an agreement on due to lack of enough cash flow from their business

respondents prefer taking loan from friends and family had a mean of 3.44 and standard

deviation of 1.297. Respondents started their business using money from family had a

mean of 3.33 and standard deviation of 1.366. Business savings has helped respondent’s

access loan easily from financial institutions had a mean of 3.24 and standard deviation of

.932 and respondents experience a challenge accessing finance from microfinance

institutions had a mean of 3.05 and standard deviation of 1.463. Respondents also

disagreed on they keep good business records that help them access finance easily from

micro financial institutions had a mean of 2.91 and standard deviation of 1.087 and they

maintain proper financial record had a mean of 2.63 and standard deviation of 1.381.

Results are shown in Table 4.2.

32

Table 4.2: Descriptive Statistics of Factors Affecting Access to Finance

VARIABLE MEAN SD

I experience a challenge accessing finance from microfinance

institutions 3.05 1.463

I keep good business records that help me access finance easily

from micro financial institutions.

2.91 1.087

Due to lack of enough cash flow from my business I prefer

taking loan from my friends and family 3.44 1.297

I started my business using my savings 3.48 1.110

I started my business using money from my family. 3.33 1.366

My business savings has helped me access loan easily from

financial institutions 3.24 .932

I usually disclose information regarding my business when

applying for a loan. 3.47 1.202

I maintain proper financial record 2.63 1.381

Aggregate Value 3.19 1.229

4.3.2 Statistical Tests

The study was set to analyze the effect of microfinance institutions on performance of

entrepreneurship in Kenya. A regression analysis was done to determine if factors

affecting access to finance influences performance of entrepreneurs.

4.3.2.1 Correlation between Factors Affecting Access to Finance and Performance of

Entrepreneurs

The study did a correlation analysis to determine the relationship between factors

affecting access to finance and performance of entrepreneurship. It was revealed that

there was a positive and insignificant relationship between affecting access to finance and

performance of entrepreneurship (r=0.26, p<0.092). This shows that with every

improvement on factors affecting access to finance there is no increase in performance.

33

Table 4.1: Correlation between Factors Affecting Access to Finance and

Performance of Entrepreneurs

Correlations

Performance Factors Affecting Access to

Finance

Performance Pearson

Correlation

1 0.26

Sig. (2-tailed) 0.092

Factors Affecting

Access to

Finance

Pearson

Correlation

0.26 1

Sig. (2-tailed) 0.092

4.3.2.2 Regression Analysis of Factors Affecting Access to Finance and Performance

of Entrepreneurs

The results revealed that the R2 was 0.068 which indicates that 6.8% of performance of

entrepreneurship is determined by factors affecting as shown in Table 4.4

Table 4.2: Regression Analysis of Factors Affecting Access to Finance and

Performance of Entrepreneurs

Model Summary

Model R R

Square

Adjusted

R

Square

Std.

Error of

the

Estimate

Change Statistics

R

Square

Change

F

Change

df1 df2 Sig. F

Change

1 .260a 0.068 0.045 0.74917 0.068 2.983 1 41 0.092

a. a. Predictors: (Constant), factors affecting access to finance

4.3.2.3 ANOVA

An ANOVA analysis was done between factors affecting access to finance and

performance of entrepreneurship and at 95% confidence level, the F value=2.983,

P<0.092). This shows that factors affecting access to finance has an insignificant effect on

performance as shown in Table 4.5.

34

Table 4.3: Anova of Factors Affecting Access to Finance and Performance of

Entrepreneurs

ANOVAa

Model Sum of

Squares

df Mean

Square

F Sig.

1 Regression 1.674 1 1.674 2.983 .092b

Residual 23.012 41 0.561

Total 24.686 42

a. Dependent Variable: Performance

b. Predictors: (Constant), factors affecting access to finance

4.3.2.4 Coefficients of Factors Affecting Access to Finance and Performance of

Entrepreneurs

The findings in Table 4.6 indicates that factors affecting access to finance has a positive

but insignificant effect on performances (β= 0.260, p>0.092).

Table 4.4: Coefficients of Factors Affecting Access to Finance and Performance of

Entrepreneurs

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std.

Error

Beta

1 Performance 2.157 .783 2.755 .009

Factors Affecting Access

to Finance

.421 .243 .260 1.727 .092

4.4 Lending Policy and Performance of Entrepreneurs

The first objective sought to find out how lending policies of micro financial institution

affects performance. Five point Likert Scale was used. Respondents were supposed to

answer the questions where; 5= Strongly Agree 2- Agree, 3= Neutral, 4 =Disagree, 1=

Strongly Disagree. In the sub-section, both descriptive and inferential statistics are

provided with regard to lending policy.

35

4.4.1 Descriptive Statistics of Lending Policy

The study established that respondents agreed that due to lack of collateral respondents

get loans from other sources had a mean of 3.63 and standard deviation of 1.092 and

respondents consider the amount of interest rates charged before seeking finance had a

mean of 3.51 and standard deviation of .985. However, respondents could not reach an

agreement on micro financial intuitions transaction costs are usually higher thus, making

respondents not apply for loans had a mean of 3.47 and standard deviation of .767. Use of

group financing has helped respondents pay their loan easily had a mean of 3.44 and

standard deviation of 1.119. Respondents are usually discouraged from applying for a

loan because they usually give them less money than what they requested had a mean of

3.44 and standard deviation of 1.031.

Findings also revealed that respondents face challenges accessing finance due to high

interest rate had a mean of 3.26 and standard deviation of 1.136. Micro financial

institutions charge high penalties on credit default had a mean of 3.26 and standard

deviation 1.217. Respondents do not like to apply for loans due to complex application

procedures had a mean of 3.23 and a standard deviation of 1.109. Respondents are able to

easily repay their loan had a mean of 3.12 and standard deviation of 1.159. Businesses

that are registered are able to access loan easily had a mean of 3.09 and standard

deviation of 1.109. Respondents do not take loans due to short loan repayment had a

mean of 3.09 and standard deviation of 1.109 and respondents have enough assets to use

as security when accessing loan from financial institutions had a mean of 3.05 and

standard deviation of 1.344. As shown in Table 4.7.

36

Table 4.5: Descriptive Statistics of Lending Policy

VARIABLE MEAN SD

I have enough assets to use as security when accessing loan from

financial institutions. 3.05 1.344

I am able to easily repay my loan 3.12 1.159

Due to lack of collateral I get loans from other sources 3.63 1.092

The use of group financing has helped me pay my loan easily 3.44 1.119

I do not like to apply for loans due to complex application

procedures

3.23 1.109

Businesses that are registered are able to access loan easily 3.09 1.109

I consider the amount of interest rates charged before seeking

finance

3.51 .985

I do not take loans due to short loan repayment 3.09 1.109

Micro financial intuitions transaction costs are usually higher

thus, making me not apply for loans

3.47 .767

I am usually discouraged to apply for a loan because they

usually give me less money than what I requested

3.44 1.031

I face challenges accessing finance due to high interest rate 3.26 1.136

Micro financial institutions charges high penalties on credit

default

3.26 1.217

Aggregate Value 3.29 1.098

4.4.2 Statistical Tests

The study was set to analyze the effect of microfinance institutions on performance of

entrepreneurship in Kenya. A regression analysis was done to determine if lending policy

influences performance of entrepreneurs

4.4.2.1 Correlation between Lending Policy and Performance of Entrepreneurship

The study did a correlation analysis to determine the relationship lending policy and

performance of entrepreneurship. It was revealed that there was a positive and significant

relationship between lending policy and performance of entrepreneurship (r=.388*,

p<0.010). This shows that with every improvement on lending policy there is an increase

in performance.

37

Table 4.6: Correlation between Lending Policy and Performance of Entrepreneurs

Correlations

Performance Lending Policy

Performance Pearson

Correlation

1 .388*

Sig. (2-tailed) .010

Lending Policy Pearson

Correlation

.388* 1

Sig. (2-tailed) .010

4.4.2.2 Regression Analysis of Lending Policy and Performance of Entrepreneurs

The findings showed that the R2 was 0.151 which indicates that 15% of performance of

entrepreneurship is determined by lending policy as shown in Table 4.9.

Table 4.7: Regression Lending Policy and Performance of Entrepreneurs

Model Summary

Model R R

Square

Adjusted

R

Square

Std.

Error of

the

Estimate

Change Statistics

R

Square

Change

F

Change

df1 df2 Sig. F

Change

1 .388a 0.151 0.13 0.71516 0.151 7.267 1 41 0.01

a. a. Predictors: (Constant), lending police

4.4.2.3 ANOVA

An ANOVA analysis was done between lending police and performance of

entrepreneurship and at 95% confidence level, the F value=7.267, P<0.010). This shows

that lending police has a significant effect on performance as shown in Table 4.10.

38

Table 4.8: Anova of Lending Policy and Performance of Entrepreneurs

ANOVAa

Model Sum of

Squares

df Mean

Square

F Sig.

1 Regression 3.717 1 3.717 7.267 .010b

Residual 20.969 41 .511

Total 24.686 42

a. Dependent Variable: performance of entrepreneurship

b. Predictors: (Constant), lending police

4.3.3.4 Coefficients of Lending Policy and Performance of Entrepreneurs

The findings in Table 4.11 indicates that lending has a positive and significant effect on

performances (β= 0.388, p<0.010).

Table 4.9: Coefficients of Lending Policy and Performance of Entrepreneurs

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1 Performance 1.455 .764 1.904 .064

Lending Policy .618 .229 .388 2.696 .010

4.5 Capacity Building and Performance of Entrepreneurs

The third objective sought to determine the effect of capacity building of micro financial

institution affects performance. Five point Likert Scale was used. Respondents were

supposed to answer the questions where; 5= Strongly Agree 2- Agree, 3= Neutral, 4

=Disagree, 1= Strongly Disagree. A regression analysis was done to determine if capacity

building influences performance of entrepreneurs

4.5.1 Descriptive Statistics of Capacity Building

The study revealed that respondent agreed that training they attended helped them grow

their business had a mean of 3.70 and standard deviation 1.166. Business training has a

positive effect to the sales growth trend in respondents business had a mean of 3.70 and

39

standard deviation .887. Through networking respondents were able to share knowledge

and learn new skills had a mean of 3.65 and standard deviation .923 and respondents are

able to understand terms and conditions required before applying for a loan had a mean of

3.65 and standard deviation of 1.152.

Findings also revealed that majority of respondents were not sure on they require more

business training to access loans had a mean of 3.37 standard deviation of 1.176. Appling

for a loan as a group is easy because respondents can get co guarantors had a mean of

3.35 and standard deviation of 1.361. Respondents have attended a training offered by

microfinance institutions to help me understand procedures that are related to loan

application had a mean of 3.26 and standard deviation of 1.026 and keeping the right

network has enabled respondents get access to loans had a mean of 3.23 and standard

deviation of 1.288. The study also showed that respondent disagreed on they have a

business plan that they can use when applying for money from microfinance institutions

had a mean of 2.98 and standard deviation of 1.165.

40

Table 4.10: Descriptive Statistics of Capacity Building

VARIABLE MEAN SD

I am aware of loans offered by micro financial institutions 3.60 1.003

I require more business training to access loans 3.37 1.176

I have a business plan that I can use when applying for money

from microfinance institutions 2.98 1.165

Business training has a positive effect to the sales growth trend

in my business 3.70 .887

I am able to understand terms and conditions required before

applying for a loan 3.65 1.152

Through training I was able to gain skills and experience needed

to run my business

3.56 1.098

I have attended a training offered by microfinance institutions to

help me understand procedures related to loan application 3.26 1.026

The training I attended helped me grow my business 3.70 1.166

Keeping the right network has enabled me get access to loans 3.23 1.288

Through networking I was able to share knowledge and learn

new skills 3.65 .923

Appling for a loan as a group is easy because I can get co-

guarantors 3.35 1.361

Aggregate Values 3.45 1.113

4.5.2 Statistical Tests

The study was set to analyze the effect of microfinance institutions on performance of

entrepreneurship in Kenya. A regression analysis was done to determine capacity building

influences performance of entrepreneurs.

4.5.2.1 Correlation between Capacity Building and Performance of Entrepreneurs

The study did a correlation analysis to determine the relationship between capacity

building and performance of entrepreneurship. It was revealed that there was a positive

and significant relationship between capacity building and performance of

entrepreneurship (r=.605***, p<0.000). This shows that with every improvement on

capacity building there is an increase in performance.

41

Table 4.11: Correlation between Capacity Building and Performance of

Entrepreneurs

Correlations

Performance Capacity Building

Performance Pearson

Correlation

1 .605**

Sig. (2-tailed) .000

Capacity

building

Pearson

Correlation

.605** 1

Sig. (2-tailed) .000

4.5.2.2 Regression Analysis of Capacity Building and Performance of

Entrepreneurship

The results revealed that the R2 was 0.366 which indicates that 36% of performance of

entrepreneurship is determined by capacity building as shown in Table 4.14.

Table 4.12: Regression Analysis of Capacity Building and Performance of

Entrepreneurs

Model Summary

Model R R

Square

Adjusted

R

Square

Std.

Error of

the

Estimate

Change Statistics

R

Square

Change

F

Change

df1 df2 Sig. F

Change

1 .605a 0.366 0.351 0.61773 0.366 23.693 1 41 .000

a. a. Predictors: (Constant), capacity building

4.5.2.3 ANOVA

An ANOVA analysis was done between capacity building and performance of

entrepreneurship and at 95% confidence level, the F value= 23.693, P<0.010). This shows

that capacity building has a significant effect on performance as shown in Table 4.15.

42

Table 4.13: Anova of Capacity Building and Performance of Entrepreneurship

ANOVAa

Model Sum of

Squares

df Mean

Square

F Sig.

1 Regression 9.041 1 9.041 23.693 .000b

Residual 15.645 41 .382

Total 24.686 42

a. Dependent Variable: performance of entrepreneurship

b. Predictors: (Constant), capacity building

4.5.3.2 Coefficients of Capacity Building and Performance of Entrepreneurship

The findings in Table 4.16 shows capacity building has a positive significant effect on

performances (β= 0.605, p<0.000).

Table 4.14: Coefficients of Factors Affecting Access to Finance and Performance of

Entrepreneurship

Model Unstandardized

Coefficients

Standardiz

ed

Coefficients

t Sig.

B Std.

Error

Beta

1 Performance .726 .576 1.260 .215

Capacity building .800 .164 .605 4.868 .000

4.6 Financial Performance

The study sought to determine the effect of financial performance. Five point Likert Scale

was used. Respondents were supposed to answer the questions where; 5= Strongly Agree

2- Agree, 3= Neutral, 4 =Disagree, 1= Strongly Disagree.

4.6.1 Descriptive Statistics of Financial Performance

The study showed that majority of respondent agreed that access to finance has helped

respondents grow their business had a mean of 3.65 and standard deviation of 1.066 and

respondents are able to achieve targets that they set for each task had a mean of 3.63 and

43

standard deviation of 1.113. However, respondents disagreed on through training,

financial performance has increased had a mean of 3.42 and standard deviation of 1.006

and savings has contributed to respondents financial performance had a mean of 3.28 and

standard deviation of 1.141.

Table 4.15: Descriptive Statistics of Financial Performance

VARIABLE MEAN SD

Access to finance has helped me grow my business 3.65 1.066

Through training, my financial performance has increased 3.42 1.006

Savings has contributed to my financial performance 3.28 1.141

I am able to achieve targets that I set for each task 3.63 1.113

Aggregate Values 3.49 1.081

4.7 Chapter Summary

Chapter four has discussed findings based on the analysis that was done from primary

data that was collected. It covered results on demography and discusses results on each

objectives using descriptive statistics. It also presents correlation and regression analysis

for each objectives. Chapter five provides summary, discussion, conclusion and

recommendations.

44

CHAPTER FIVE

5.0 SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter discusses summary of the findings, conclusion and recommendation of the

study. It also covers summary and gives conclusion based on research objectives. It then

discusses recommendation based on the conclusion and gives recommendation for further

studies.

5.2 Summary

The general objective of this study was to determine the effect of microfinance banks on

the development of entrepreneurship in Kenya, the case of bodaboda business in Nairobi.

The study was guided by the following research objectives: to examine factors affecting

access to finance on performance of Bodaboda entrepreneurs in Roysambu and Safari

Park Area; to find out how lending policies of micro financial institution affects

performance of Bodaboda entrepreneurs in Roysambu and Safari Park Area; and to

determine the effect of capacity building of micro financial institution affects

performance of Bodaboda entrepreneurs in Roysambu and Safari Park Area.

A descriptive research design was used because it helps the researcher find out the what,

who, where, when or how much. Target population used was 164 bodaboda operators in

Royambu and Safari Park. Clustered random sampling was used and a quota of 30%

which was drawn from each strata thus, giving us a sample size of 48 respondents.

Questionnaires were used to collect data. Data was analyzed using descriptive statistics.

Pearson correlation and regression analysis was used to determine the influence of

independent variables on the dependent variable.

The findings on factors affecting access to finance and its effect on performance of

Bodaboda entrepreneurs revealed that majority of respondents agreed that they started

their business using their savings and respondents usually disclose information regarding

their business when applying for a loan. Respondents could not however reach an

agreement on due to lack of enough cash flow from their business they prefer taking loan

from friends and family. Respondents started their business using money from family.

45

Business savings has helped respondent’s access loan easily from financial institutions

and respondents experience a challenge accessing finance from microfinance institutions.

Respondents also disagreed on they keep good business records that help them access

finance easily from micro financial institutions and they maintain proper financial record.

A regression analysis was done and It was revealed that there was a positive and

insignificant relationship between affecting access to finance and performance of

entrepreneurship (r=0.26, p<0.092).

The findings on how lending policies of micro financial institution affects performance of

Bodaboda entrepreneurs. Showed that respondents agreed that due to lack of collateral

respondents get loans from other sources. Respondents consider the amount of interest

rates charged before seeking finance. However, respondents could not reach an agreement

on micro financial intuitions transaction costs are usually higher thus, making respondents

not apply for loans; use of group financing has helped respondents pay their loan easily.

Respondents are usually discouraged to apply for a loan because they usually give them

less money than what they requested. Findings also revealed that respondents face

challenges accessing finance due to high interest rate. Micro financial institutions charges

high penalties on credit default. Respondents do not like to apply for loans due to

complex application procedures. Respondents are able to easily repay their loan.

Businesses that are registered are able to access loan easily. Respondents do not take

loans due to short loan repayment and respondents have enough assets to use as security

when accessing loan from financial institutions. A regression analysis was done and It

was revealed that there was a positive and significant relationship between lending policy

and performance of entrepreneurship (r=.388*, p<0.010).

The findings on effect of capacity building of micro financial institution affects

performance of Bodaboda entrepreneurs respondent agreed that training they attended

helped them grow their business. Business training has a positive effect to sales growth.

Through networking respondents were able to share knowledge and learn new skills and

respondents are able to understand terms and conditions required before applying for a

loan. Findings also revealed that majority of respondents were not sure on they require

more business training to access loans had. Appling for a loan as a group is easy because

46

respondents can get co guarantors. Respondents have attended a training offered by

microfinance institutions to help them understand procedures that are related to loan

application and keeping the right network has enabled respondents get access to. The

study also showed that respondent disagreed on they have a business plan that they can

use when applying for money from microfinance institutions. A regression analysis was

done and it was revealed that there was a positive and significant relationship between

capacity building and performance of entrepreneurship (r=.605***, p<0.000).

5.3 Discussion

5.3.1 Access to Finance and Performance of Bodaboda Entrepreneurs

The findings established that respondents started their business using their savings. This

is in line with a study done by Gichuki (2012) who stated that self-employed businesses

had the highest form of informal financing, 37% use personal credit cards, 36% use their

own personal savings while 34% used commercial loans. This implies that small

businesses depend on informal financing such as business owner’s savings and personal

credit facilities.

The study revealed that respondents usually disclose information regarding their business

when applying for a loan. Schayek (2011) claims that most SME’s owners/managers are

very sensitive about disclosing information relating to their firm’s financial performance.

According to Mazanai and Fatoki (2012), start-up SMEs are usually affected by

information asymmetry problems because information is usually inadequate and not

transparent. New SMEs are also unwilling to provide full information about their business

therefore, limiting them from accessing finance from financial institutions.

Entrepreneurs are more likely to be affected by information asymmetry problems.

Moreover, information asymmetries are common in new and technology-based

propositions. It occurs when manufacturing or technology based firms, are reluctant to

provide full information because they fear that that disclosure may make it easier for their

competitors to exploit (Deakinset et al, 2008).

47

The findings revealed that due to lack of enough cash flow from their business they prefer

taking loan from friends and family and respondents started their business using money

from family. Mazanai and Fatoki (2012) revealed that that due to lack of enough cash

flow from their business they prefer taking loan from friends and family and respondents

started their business using money from family. Macharia (2012), The study found that

in financing of the micro and small business, family and friends played a big role

in helping business owners to boost their operations with an average of 40% of the

finances coming from them, an average of 24% came from microfinance institutions

while on average 30% of the finances were from business savings.

Oliveira and Fortunato (2006) found that small firms face financial limitation which

affects their growth and development in the long run. Moreover, small firms are also not

able to make use of economies of scale as compared to large firms. This is because small

firms do not have sufficient cash flow and are not able to depend on bank financing but

depends on their own equity investment.

It was indicated that business savings has helped respondent’s access loan easily from

financial institutions. According to Onyango (2010), most firms usually start as family

owned business and use their savings and family finance. The business then grows and

they start seeking for funds from other microfinance institutions. With time it becomes

well established and starts keeping good business records, developed accounting systems,

establish a legal identity and start seeking finance form financial institutions Bello (2013)

argued that increasing access to saving is important because it helps the people who come

from poor areas that have not qualified for Microfinance services, to save with

microfinance institutions thus, be able to access micro-credit and alleviate poverty.

The findings revealed that respondents experience a challenge accessing finance from

microfinance institutions. Canton et al (2013) noted that entrepreneurs are facing a

challenge to access finance from financial institutions due to lack of sufficient

information that is needed and transparency hence, hindering their growth and

development. Pierluigi and Valentina (2017) revealed that family owned firms are more

likely to experience difficulty accessing credit from financial institutions. Gichure (2016)

in his study it was revealed that the SMEs faced challenges in accessing finance due to

information asymmetry

48

According to Fatoki and Odeyemi (2010), studies have shown that demographic factors

such as; size, ownership type, age and sector influence the access to finance. Small firms

have more credit limitations as compared to large firms. Small firms are owned and

operated by private individuals who have no legal obligation to report financial

performance or to regularly audit their financial accounts. Small firms also have fewer

assets to provide as collateral and they are also linked with high failure rates as compared

to large firms Pandula (2011).

The findings showed that respondents dose not maintain proper financial record Kakuru

(2013) stated that small firms are not able to provide financial information, because it is

owned and operated by the owner, they have fewer assets and they lack legal requirement

to regularly report financial information and also lack audited financial accounts. Joseph

(2013) noted that financial characteristics such as business registration, accurate

documentation of transaction and financial activities as well as good business planning

have a positive correlation with credit accessibility. A study done by Aunga (2017)

revealed that lack of adequate accounting information is one of the challenges that small

scale entrepreneurs are facing while accessing loans from financial institutions.

It was established that respondents disagreed on they keep good business records that

help them access finance easily from micro financial institutions. Beck et al (2013)

postulated that financial structure, size and access to finance it was revealed that

information asymmetry is caused by poor accounting records, lack of audited financial

statements and inadequate access to SMEs information from credit bureaus. Nanyondo et

al (2014) in their study it was established that there was a significant and positive

relationship between quality of financial statements and access to finance and a

significant and negative relationship between information asymmetry and access to

finance.

5.3.2 Lending Policy on Performance of Bodaboda Entrepreneurs

It was determined that due to lack of collateral respondents get loans from other sources.

This is in line with a study done by Abdinor (2013) which revealed that most SME’s do

not have collateral thus, end up seeking for finance from cheaper sources. It was

49

recommended that the government and other financial institutions should ease the

accessibility of credit in small and medium enterprises to the microfinance institutions

and minimize the collateral conditions. SMEs should also be encouraged to use group

financing so as to minimize loan defaulting. Hongbo et al, (2009) postulated that due to

lack of collateral and guarantees the entrepreneurs in China find it difficult to access loan

from financial institutions thus preventing them from contributing in the economic

development of the country.

The study found that respondents consider the amount of interest rates charged before

seeking finance. Muthoka (2012) postulated that SMEs benefit from loans from

microfinance institutions, and they seek financial assistance from the MFIs due to interest

rate, easy loan repayment and amount offered. Abdi and Gikandi (2016) in their study it

was concluded that SACCO’s interest rate policy affect SMEs accessibility to credit. It

was suggested that SACCO’s should consider revising their policy on interest rate

charged and the county government should intervene to ensure that SMEs have access to

financial services to enable them contribute to development and employment creation.

The study has determined that micro financial intuitions transaction costs are usually

higher thus, making respondents not apply for loans. Smaller and younger entrepreneurs

usually encounter higher cost of financing and are also required to produce collateral

however; smaller entrepreneurs have fewer assets to offer as collateral (Berger & Udell

(2002). Access to credit by SME’s has reduced because micro financial institutions have

failed to increase SME’s loans due to lack of information, high transaction costs, large

number of borrowers and low returns from investments (Olutunla & Obamuyi, 2008).

The findings revealed that respondents disagreed on respondents are usually discouraged

to apply for a loan because they usually give them less money than what they requested.

Cassar (2004) indicated that it is costly for smaller firms to resolve information

asymmetries with debt providers. Therefore, small firms will be offered less debt capital

as compared to larger firms. Transaction cost may also be higher. In addition, smaller

firms are also not able to raise capital because capital markets they are not able to reach

capital markets due to their size.

It was indicated that respondents face challenges accessing finance due to high interest

rate. According to a study done by Kimaiyo (2016), it was concluded that most SMEs did

50

not apply for credit due to complex application procedures, high interest rate, and

insufficient collateral and poor record keeping. A lot of micro finance institutions are

considering to start providing financial services to low income clients, women

entrepreneurs and the self-employed who not able to access banking and other services.

Moreover, the ability to offer credit facilities to customers by lending institutions was

determined by the value of collateral, credit repayment records, interest rates and the

amount of savings customer have (Lumumba, 2016). Bett (2016) stated that majority of

SME’s are afraid of applying for credit due to high interest rates and lack of information

on availability of more affordable services that are being offered.

The findings showed that respondents do not take loans due to short loan repayment.

Bragg (2010) postulated that the short time frame given to entrepreneurs to repay their

loans reduces the risk of non-repayment to the bank, which will make the business’s

fortunes not decline so far within such a short time period that it cannot repay the loan,

while the bank will also be protected from long-term variations in the interest rate”. Pius

(2010) in her study on influence of microcredit finance on the growth of small scale

women entrepreneurs in Kenya. It was indicated that repayment period affected the cash

flow into the business

It was determined that respondents do not have enough assets to use as security when

accessing loan from financial institutions. Omondi and Jagongo (2018) suggested that

lack of access to credit is a major factor that prevents the growth of entrepreneurial sector.

It limits entrepreneurs from gaining financial services due to lack of tangible security

combined with inappropriate legal and regulatory framework that does not recognize

innovative strategies for lending to entrepreneurs.

5.3.3 Capacity Building Performance of Bodaboda Entrepreneurs

The finding revealed that respondent agreed that training they attended helped them grow

their business. This is in contrast to a study done by Owuor (2015) it was revealed that

there weak correlation between training and growth of women owned SMEs in Ruiru Sub

County and business training services were offered to a very small extent, attendance was

not regular and there was no follow up on implementation advisory services offered

during such training. A study done by Kisaka and Mwewa (2014) revealed that that

51

micro-credit, micro-savings and training jointly contribute positively to SMEs growth.

According to King and McGrath (2012), the growth of entrepreneurs is greatly affected

by education. Entrepreneurs who have large stocks of human capital in terms of education

and vocational training are able to easily adapt to changes that are taking place in the

environment.

The study showed that respondents are able to understand terms and conditions required

before applying for a loan. Donkor (2012) argued that one of the major challenges that

entrepreneurs face is lack of financial literacy. This affects entrepreneur’s ability to

access finance from financial institutions. Some entrepreneurs are not able to understand

the terms and conditions required before applying for a loan and are usually reluctant

when repayment period tend to be longer than expected. Some financial institutions take

advantage of their illiteracy and refuse to give them more information and explain interest

rate and its implication on the loan that they are about to take.

It was indicated that through networking respondents were able to share knowledge and

learn new skills. Sungur (2015) argued that if networking is well used it will increase

entrepreneur’s financial performance and market share. It will also help entrepreneurs

identify new opportunities, share knowledge and skills and reduce their level of

uncertainty surrounding the operation of the organization. Networking is the process of

building long-term relationships with an aim of exchanging information and resources

(Lama & Shrestha, 2011). According to Mano (2014) networking is creation of formal

relationships where participants share information. According to Ngoc and Nguyen

(2009), networking will help entrepreneurs to access external finance, gain more

knowledge and skills and get support they need for microfinance institutions.

Respondents could not reach an agreement on they have attended training offered by

microfinance institutions to help them understand procedures that are related to loan

application. Entrepreneurs from rural areas are not able to understand services offered by

micro financial institutions they also lack understanding of loan procedures. Moreover,

lack of information and knowledge makes entrepreneurs have a weak bargaining power in

terms of interest paid, asset and liability disclosure, misuse of loan funds and generally

bad preparedness (Bbenkele, 2007).

52

Findings also revealed that majority of respondents could not reach an agreement on they

require more business training to access loans. Kimanzi (2016) in his study it was

recommended that leaders in the women enterprises should be trained and given advice

on investment opportunities. Studies have revealed that lack of training is one of the

challenges that entrepreneurs are facing when accessing microfinance. Entrepreneurs lack

training on how to generate profit from microfinance institution thus, making them fail to

manage the loan (Ashe et al, 2011). Rono (2018) stated that financial institutions should

also take part in mentorship programs where SMEs should be introduced to professional

marketers and business development in order to ensure growth of their enterprises

It was revealed that respondents could not reach an agreement on keeping the right

network has enabled respondents get access to loans. According to Ngoc and Nguyen

(2009), networking will help entrepreneurs to access external finance, gain more

knowledge and skills and get support they need for microfinance institutions. Heshmati

(2013) adds that networking can also help organizations learn suitable business activities

and increase their ability to access finance from microfinance activities. As study done by

Tafadzwa and Olawale (2013) study revealed that there is a significant and positive

relationship between networking and access to debt finance and performance of SMEs.

According to Ngoc and Nguyen (2009), networking will help entrepreneurs to access

external finance, gain more knowledge and skills and get support they need for

microfinance institutions. Gunto and Alias (2014) in their study, it was established that

there is a positive and significant relationship between networking and access to finance.

5.4 Conclusions

5.4.1 Access to Finance and Performance of Bodaboda Entrepreneurs

The study concluded that a lot of entrepreneurs started their business using their savings

and when applying for a loan they also feel free to disclose information regarding their

business when applying for a loan. However, due to lack of enough of cash flow

entrepreneurs prefer loans from friends and family. Entrepreneurs are also not able to

access loan because they use their business savings and they also lack business records

has made it hard for entrepreneurs to access loans.

53

5.4.2 Lending Policy on Performance of Bodaboda Entrepreneurs

In conclusion, respondents get loan from other financial institutions due to lack of

collateral and they also consider the amount of interest rate the microfinance institution

are offering before applying for a loan. Entrepreneurs are also not able to get loan form

microfinance institutions because transaction costs are usually high, short loan repayment

period and lack of enough assets and group financial has not helped entrepreneurs to pay

their loan

5.4.3 Capacity Building on Performance of Bodaboda Entrepreneurs

Training has helped Bodaboda entrepreneurs grow their business and sales and it has also

helped them understand terms and conditions required before applying for a loan.

Networking has also helped Bodaboda operators to share knowledge and learn new skills.

However, respondents have not attended a training offered by microfinance institutions to

help them understand procedures and some were not sure is they need more business

training to access loans. In addition, they also do not have a business plan that they can

use when applying for loans form microfinance institutions.

5.5 Recommendations

5.5.1 Recommendation for Improvement

5.5.1.1 Access to Finance and Performance of Bodaboda Entrepreneurs

MFIs should conduct an awareness campaign to encourage Bodaboda operators to save

more. This will help their shares increase. It was also recommended that Bodaboda

operators should be encouraged to register their business, have accurate documentation of

transaction and financial activities as well as good business planning. This will reduce

information asymmetry and make it easy for them to access loans from MFIs.

5.5.1.2 Lending Policy on Performance of Bodaboda Entrepreneurs

There is need for MFIs and government to come up with a strategy to provide

entrepreneurs with loans at a lower interest rate, reduce the transaction cost, increase

repayment period, make the application process user friendly and easy and minimize

penalty charged to businesses that are not able to repay their loans on time. This will

encourage a lot of entrepreneurs to apply for loans thus contribute towards general output

in the economy.

54

5.5.1.3 Capacity Building Performance of Bodaboda Entrepreneurs

Based on findings it is recommended that MFIs should offer entrepreneurs short courses.

Through this, entrepreneurs will be able to gain more knowledge and skills on financial

management, book keeping, preparing financial statements and budgeting. Entrepreneurs

will also be able to know services that MFIs provide, procedures and how to apply for

those services.

5.5.2 Recommendations for Further Studies

The study only focused on effect of microfinance institutions on performance of

entrepreneurship in Kenya and it looked at factors affecting access to finance, lending

policy and capacity building. Very few studies have been done on capacity building

therefore, more studied should be done. In addition, research should also be done to

identify other factors that might affect performance of entrepreneurship in terms of access

to finance.

55

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APPENDIX I: QUESTIONNAIRE

Effect of Microfinance Institutions on Performance of Entrepreneurship in Kenya:

A Case of Bodaboda Business in Nairobi County

This questionnaire helps in data collection for academic purpose only. The research

intends to give an analysis of effects of microfinance institutions on performance of

entrepreneurship in Kenya. All information attained, will be treated confidentiality. Do

not incorporate identification or names in the questionnaire.

SECTION A: DEMOGRAPHIC FACTORS

Please answer every question as outlined by using a tick (√) in the option that applies

1. What is your Age?

Below 25 years25-30 years

31-39years

40 years and Above

2. What is your Gender? Male Female

3. What is your marital statues

Single Married Divorced Widowed

4. What is your highest level of education?

Primary Secondary education Certificate Diploma

Degree Other

5. How long have been running this business?

0 - 2 years 3 - 5 years 6-8 years Above 9 years

6. What type of financing have you accessed?

Bank Loan Loan from Sacco Personal Savings Loan from Family

Loan from Friends

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SECTION B: FACTORS AFFECTING ACCESS TO FINANCE

Please indicate your opinion as per the level of disagreement or agreement with the

outline statement using 1 to 5 scale guideline. 5= Strongly Agree 2- Agree, 3= Neutral,

4 =Disagree, 1= Strongly Disagree.

SECTION C: LENDING POLICY

Please indicate your opinion as per the level of disagreement or agreement with the

outline statement using 1 to 5 scale guideline. 5= Strongly Agree 2- Agree, 3= Neutral,

4 =Disagree, 1= Strongly Disagree.

LENDING POLICY 1 2 3 4 5

1 I have enough assets to use as security when

accessing loan from financial institutions.

2 I am able to easily repay my loan

3 Due to lack of collateral I get loans from other

sources

4 The use of group financing has helped me pay my

loan

5 I do not like to apply for loans due to complex

application procedures

6 Businesses that are registered are able to access

loan easily

7 I consider the amount of interest rates charged

before seeking finance

8 I do not take loans due to short loan repayment

9 Micro financial intuitions transaction costs are

usually higher thus, making me not apply for loans

10 I am usually discouraged to apply for a loan

because they usually give me less money than what

I requested

11 I face challenges accessing finance due to high

interest rate

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12 Micro financial institutions charges high penalties

on credit default.

SECTION D: CAPACITY BUILDING

Please indicate your opinion as per the level of disagreement or agreement with the

outline statement using 1 to 5 scale guideline. 5= Strongly Agree 2- Agree, 3= Neutral,

4 =Disagree, 1= Strongly Disagree.

CAPACITY BUILDING 1 2 3 4 5

1 I am aware of loans offered by micro financial

institutions

2 I require more business training to access loans

3 I have a business plan that I can use when applying

for money from microfinance institutions

4 Business training has a positive effect on sales

growth trend in my business

5 I am able to understand terms and conditions

required before applying for a loan

6 Through training I was able to gain skills and

experience needed to run my business

7 I have attended a training offered by microfinance

institutions to help me understand procedures

related to loan application

8 The training I attended helped me grow my

business

9 Keeping the right network has enabled me get

access to loans

10 Through networking I was able to share knowledge

and learn new skills

11 Appling for a loan as a group is easy because I can

get co guarantors

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SECTION E: FINANCIAL PERFROMANCE

Please indicate your opinion as per the level of disagreement or agreement with the

outline statement using 1 to 5 scale guideline. 5= Strongly Agree 2- Agree, 3= Neutral,

4 =Disagree, 1= Strongly Disagree.

FINANCIAL PERFROMANCE 1 2 3 4 5

1 Access to finance has helped me grow my business

2 Through training, my financial performance has

increased

3 Savings has contributed to my financial

performance

4 I am able to achieve my targets that I set for each

task

THANK YOU FOR YOUR PARTICIPATION

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APPENDIX II: NACOSTI CERTIFICATE