A RESEARCH PROJECT SUBMITTED IN PARTIAL FILMENT OF THE A WARD OF THE REQUIREMENTS FOR THE A WARD OF ADVANCE DIPLOMA IN BUSINESS MANAGEMENT CATHOLIC UNIVERSITY OF EASTERN AFRICA-GABA CAMPUS NOVEMBER 20

This report on Effects of Lending Services on Performance of Microfinance is based on the following objectives; determine the effect of the loaning period on the performance of women's finance trust, find out the effect of the loan repayment period and security policy on the performance of Kenya women's finance trust. The study adopted the theory of capital structure. The study employed a descriptive research design. The target population was 10 employees of Kenya women finance trust, Bungoma Branch.

EFFECTS OF LENDING SERVICES ON PERFORMANCE OF
MICROFINANCE INSTITUTIONS IN KENYA: ACASE OF KENYA WOMEN
FINANCE TRUST BUNGOMA
MURUNGA LEWIN WANYONYI
AD/BM/GC/1034761/18
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE A
WARD OF THE REQUIREMENTS FOR THE A WARD OF ADVANCE
DIPLOMA IN BUSINESS MANAGEMENT
CATHOLIC UNIVERSITY OF EASTERN AFRICA- GABA CAMPUS
NOVEMBER, 2019
i

DECLARATION
This Project is my original work and has never been presented for the award of
Certificate in any other institutions.
Murunga Lewin Wanyonyi
AD/BM/GC/1034761/18
Signature……………………… Date……………………………………
SUPERVISOR
This project has been submitted for examination with the approval of the institute
supervisor.
Mr. Francis Anyira
Signature……………………… Date……………………………………
ii

ACKNOWLEDGEMENT
I wish to thank the management of Catholic University of Eastern Africa for bringing
education closer to the consumers. I recognize the support and assistance accorded to me
during the assembling of this document by my supervisor Mr. Francis Anyira. His
comments and suggestions have gone a long way in shaping the nature of this study.
iii

ABSTRACT
This study sought to investigate the effect of lending services on performance of
microfinance institutions in Kenya with special reference to Kenya women finance trust
Bungoma Branch of Bungoma County. The study was guided by the following objectives
to; determine the effect of loaning period on performance of women finance trust, find
out the effect of loan repayment period and security policy on performance of Kenya
women finance trust. The study adopted the theory of capital structure. The study
employed a descriptive research design. The target population was 10 employees of
Kenya women finance trust, Bungoma Branch. Purposive sampling was used to select all
the 10 respondents to form the sample size. Data was collected using questionnaires. The
raw data was analyzed using descriptive statistics and presented using APA tables. The
findings found out that loaning period, loan repayment and loan security directly
influenced the performance of Kenya women finance trust.
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TABLE OF CONTENTS
DECLARATION............................................................................................................................ii
DEDICATION...............................................................................................................................iii
ACKNOWLEDGEMENT.............................................................................................................iv
ABSTRACT...................................................................................................................................v
LIST OF TABLES.........................................................................................................................ix
LIST OF FIGURES........................................................................................................................x
LIST OF ACRONYMS.................................................................................................................xi
DEFINITION OF TERMS............................................................................................................xii
CHAPTER ONE.............................................................................................................................1
INTRODUCTION..........................................................................................................................1
1.1Background to the Study.............................................................................................1
1.2 Statement of the Problem...........................................................................................3
1.3 Research Question…………………………………………………………………..4
1.4 Significance of the Study...........................................................................................4
1.5 Scope and Delimitation of the Study.........................................................................4
1.6 Theoretical Framework..............................................................................................5
1.6.1 Theory of Capital Structure.....................................................................................5
1.7 Conceptual frame work..............................................................................................5
CHAPTER TWO.................................................................................................................7
LITERATURE REVIEW...............................................................................................................7
2.1 Critical Review of Theories.......................................................................................7
2.1.1 Credit Market clearing (neo-classical) theory.........................................................7
2.1.2 Signaling Argument................................................................................................8
2.1.3 Firm Characteristics................................................................................................8
2.1.4 Loan Pricing Theory...............................................................................................9
2.2 Gaps in the Theories..................................................................................................9
2.2.1 Critic of Credit Market clearing (neo-classical) theory..........................................9
2.2.2 Critic of Signaling Argument................................................................................10
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2.2.3 Critic of Firm Characteristics................................................................................10
2.2.4 Critic of the Loan Pricing Theory.........................................................................10
2.3 Critical Review of Empirical Studies.......................................................................10
2.3.1Effects on lending services....................................................................................10
2.3.2 Loaning period and Performance of MFIs............................................................10
2.3.3 Repayment terms and Performance of MFIs........................................................11
2.3.4 Security policy and Performance of MFIs............................................................11
2.4 Knowledge Gap........................................................................................................12
CHAPTER THREE......................................................................................................................13
RESEARCH DESIGN AND METHODOLOGY.........................................................................13
3.1 Research Design.......................................................................................................13
3.2 Target Population.....................................................................................................13
3.3 Description of Research Instruments.......................................................................13
3.4 Description of Sample and Sampling Procedure.....................................................13
3.5 Description of Data Collection Procedure...............................................................14
3.6 Description of Data Analysis Procedures................................................................14
CHAPTER FOUR........................................................................................................................15
PRESENTATION, DISCUSISION AND INTERPRETATION OF FINDINGS.........................15
4.1 Presentation of Findings...........................................................................................15
4.1.1Response Return Rate............................................................................................15
4.1.2 Demographic Characteristics................................................................................15
4.1.2.1 Gender of the Respondents................................................................................15
4.1.2.2Level of education of respondents......................................................................16
4.1.3 Loaning period and Performance of Kenya Women Finance Trust.....................16
4.1.4 Repayment terms and Performance of Kenya Women Finance Trust..................17
4.1.5 Security policy and Performance of Kenya Women Finance Trust......................18
4.2 Discussion of Findings.............................................................................................18
4.3 Interpretation of the Findings...................................................................................20
CHAPTER FIVE..........................................................................................................................22
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS.................................................22
5.1Summary of the Findings..........................................................................................22
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5.3 Recommendations....................................................................................................23
REFERENCES.............................................................................................................................25
APPENDIX ONE: QUESTIONNAIRE FOR RESPONDENTS..................................................27
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LIST OF TABLES
Table 4.1 Gender of the respondents…………………………………………………….15
Table 4.2 level of education of the respondents…………………………………………16
Table 4.3 Loaning Period and Performance of Kenya Women Finance Trust…………..17
Table 4.4 Repayment Period and Performance of Kenya Women Finance Trust ………17
Table 4.5 Security Policy and Performance of Kenya Women Finance Trust…………..18
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LIST OF FIGURES
Figure 1.1: Conceptual frame work .............................................................................6
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LIST OF ACRONYMS
IFAD : International Fund for Agricultural Development
MSEs : Micro and Small Enterprises
OECD : Organization of Economic Corporation and Development
GOK : Government of Kenya
KBS : Kenya Bureau of Statistics
GDP : Gross Domestic Product
YWEFP: Youth and Women Enterprise Fund
CEEDR: Centre for Enterprise and Economic Development Research
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DEFINITION OF TERMS
Micro and Small Enterprise- An entity with a legal structure employing between 4-50
workers (Kapoor et al, 1997)
Financial access- Firm’s ability to get and use financial services that are affordable,
usable and meet its needs (Claessen, 2006)
Capital Structure- Mix of debt and equity that a firm uses to finance its operations
(Gitman, 2003)
Financing gap- A condition whereby MSEs experience unwarranted prejudice from
capital market, accept punitive interest rates or high levels of security (Beaver, 2002)
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CHAPTER ONE
INTRODUCTION
1.1Background to the Study
There has been an increase in the recognition of the role played by Micro and Small
Enterprises (MSE’s) sector in driving national economies. The sector’s contribution to
employment creation, poverty alleviation, savings and economic growth has been
recognized and documented by governments of both the developed and the developing
countries (Obert and Olawale 2010). Kayanula and Quartey (2000) argued that Mses
Sector employs more than 22 % of the labour force in developing countries. According
to Olomi (2005) found out that MSEs are the training grounds for entrepreneurship and
managerial development and motivated individuals to find new avenues for investment
and expanding operations. Small businesses are therefore the life blood of the economy
and are and will continue to be the main provider of new jobs (Hewitt, 2002).
According to The Kenya Economic Survey (2006), the sector contributed over 50% of
all new jobs created in Kenya in the year 2005. OECD (2006) reveals that small firms
are recognized worldwide to be the key sources of dynamism, Innovation and
flexibility.
Kenya suffers from high unemployment rate with an official estimate of approximately
75% of the economically active population unemployed (International Fund for
Agricultural Development- IFAD, 2009). One of the best ways to address
unemployment problem is to leverage the employment creation potential of MSE’s and
to promote small business development. The development of the sector in Kenya was
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crucial in reducing poverty as it was estimated to have employed 5.1million people in
year 2003 (GOK, 2003). The prospects of coping and dealing with the frustrations and
anxieties of an increasing vocal unemployed population are frighteningly poor. There is
an urgent need for policy actions to include employment creation as major social and
economic objectives for promoting the sector (Todaro,1989). According to Mead
(1998), the health of the economy as a whole has a strong relationship with the health
and nature of micro and small enterprises. When the state in macro economy is less
favorable, the opportunities for profitable employment expansion in MSEs are limited.
In Kenya, the government has Identified MSE sector as a vehicle for increasing jobs to
reduce the high unemployment rate estimated at 22.4% p.a (Kenya Bureau of
Statistics, 2011). This has seen the sector being Incorporated in the country’s
development plans and support structures such as the Youth and Women Enterprise
Fund Programmes,( YWEP), to provide Loans at a concessionary rate or guarantee
their repayments as funding is cited as one of the critical factor impeding the growth
and development of the sector( Kiiru, 1991).
According to Gok (1986), the sector offers unmatched potential as a source of new
jobs for the expanding labour force while the self-employed and small scale enterprise
represent part of business activity in market towns. Unemployment is associated with
human circumstances of object poverty and low levels of Living (Todaro, 1989). The
only notable way of getting such income to improve standard of living and increase the
GDP growth rate is starting and developing small firms (Small business Magazine,
2005).According Kiira(2013) a strong developed productive industrial sector can only
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be attained where MSEs and large enterprises not only exist but also functions in a
symbiotic relationship.
In spite of the enormous role played by MSEs, their long term growth and survival is
hampered by non-availability of debt finance (Beck, 2007). An enduring gap exist that
results in MSE’s being discriminated against in their effort to raise capital (Beaver ,
2002).Wanjohi and Mugure(2008) argues that financial constraints remain a major
challenge facing MSE sector’s growth in Kenya . Zororo(2011) revealed that the
financial aspects of setting up a business were without doubt the biggest obstacles for
MSEs as some of them were unable raise huge collateral demanded by banks as a
condition to access loans (Kimathi, 2009).A financing gap therefore exist among
MSE’s in their quest for growth and development.
1.2 Statement of the Problem
Several studies have been done on performance of microfinance institutions. Maiti
(2015) did a study on effect of credit policy on financial performance of deposit taking
Savings and Credit Co-operative Societies in Nairobi. The objective of the study was to
establish the effect of credit policy on the financial performance of SASURA regulated
SACCOs in Nairobi. The research found out that regulated SACCOs had adopted credit
standards, credit term policy loan ration in determination of how much a client would
borrow. Mwithi (2012) found a positive correlation between credit risk assessment and
performance of microfinance institutions in Nyeri County. In his study, Simiyu (2008),
established that in measuring risk of default and migration of credit many of the
institutions used the Credit Metrix. Stringent operational regulations facing
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microfinance institutions is the challenge from Central Bank of Kenya as the results
showed. Most of these studies focused on deposit taking MFIs.
Based on the above studies, there was need for the current study to be carried out in
Bungoma County as the mentioned studies had been conducted in other counties. This
research intended to fill the gap of knowledge by investigating the relationship between
lending services and performance of microfinance institution with special reference to
Kenya women finance trust, Bungoma Branch.
1.3 Research Questions
The study was guided by the following research questions;
1. What is the effect of loaning period on performance of Kenya women finance trust?
2. What is the effect of loan repayment on performance of Kenya women finance trust?
3. What is the effect of loan security policy on performance of Kenya women finance
trust?
1.4 Significance of the Study
It is hoped that the findings of the study would assist other researchers by providing
additional knowledge on the already existing literature on the study topic. The findings
would also determine the extent to which financial access by firms could enhance their
growth and survival so that they can continue to effectively contribute to the development
challenges facing Kenya, like unemployment, poverty, reduced economic growth and
widespread income inequality as documented in Vision 2030.
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1.5 Scope and Delimitation of the Study
The study was carried out in covered Bungoma County. It was delimitated to the effects
of lending services in micro finance institutions with special interest to Kenya Women
Finance Trust Bungoma Branch, Kenya. The unit of measurement was employees of
Kenya Women Finance Trust Bungoma Branch.
1.6 Theoretical Framework
The relevant theoretical framework on which the study is based was capital structure.
1.6.1 Theory of Capital Structure
Capital structure is described as a mix of debt and equity that a firm uses to finance its
operations (Gitman, 2003).
The origin of Modern capital structure theory lies in the work of Modigliani and Miller,
(1958, 1963) static trade of theory. According to theory when a firm requires external
financing, a debt is preferred to external equity as interest charged on it is tax deductable
thereby creating tax savings to the firm. Accordingly to the theory, a firm will reduce the
cost of capital and maximize it by using more debt in the capital structure. That when
more debts are used in the capital structure, the average cost of capital is reduced and
profitability of the firm enhanced (MM, 1963).
1.7 Conceptual frame work
Figure 1 .1 Conceptual frameworks on effects of lending services on performance of
microfinance institutions in Kenya: a case of women finance trust, Bungoma County.
In this study the independent variable was effects, while the dependent variable was
performance of MFIs.
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Independent Variable Dependent Variable
It is hypothesized that the independent variable with its components loaning period,
repayment period and security policy directly influence the dependent variable
performance of microfinance institutions (Kenya women finance trust).
xvii
Loaning period
Repayment terms
Security policy
Performance of
MFIs

CHAPTER TWO
LITERATURE REVIEW
2.1 Critical Review of Theories
2.1.1 Credit Market clearing (neo-classical) theory
This theory postulates that if collateral and other pertinent restrictions remain given, then
it is only the lending rate that determines the amount of credit that is dispensed by the
banking sector. Therefore with an increasing demand for credit and a fixed supply of the
same, interest rates will have to rise. Any additional risk to a project being funded by the
bank should be reflected through a risk premium that is added to lending rate to match the
increasing risk of default. Subsequently, there exist a positive relationship between the
default probability of a borrower and the interest rate charged on the advance.
Although this theory does not explicitly discuss how collateral would impact on the risk
premium, it creates the impression that collateral has no effect on lending rate, and if a
risky borrower would wish to face the same lending rate as a borrower with a lower risk,
then all that is required is to pledge more collateral to lower his risk profile and therefore
enjoy a lower risk premium. This brings about the ‘moral hazard’ and ‘adverse selection’
phenomena, firstly because of information asymmetry existing between the lender and
borrowers. The borrower has a more accurate assessment of the risk profile of this
investment that is not known by the lender and thus may perform secret actions to
increase the risk of his investment without the realization of the lender. The adverse
selection problem appears as lenders raise their interest rates to shield themselves from
xviii

default and on the other hand attract only high risk borrowers and eliminate low risk
borrowers.
2.1.2 Signaling Argument
According to this theory, borrowers who always have private information will be forced
to reveal (signal) their better quality through pledging of collateral to show their better
status as opposed to lower quality borrowers. This is because in the absence of full
information the bank is not able to assess the true quality of a borrower and may resort to
credit rationing in an attempt to mitigate the problem of adverse selection. Pledging more
collateral is therefore viewed by borrowers a most credible signal of their commitment
towards repayment of the advance amount. Lower quality buyers who have private
information regarding the true risk profile of their investment will shy away from
pledging valued collateral, since they privately know that there is a higher chance of
losing it because they will be unable to service the loans. Thus, they unknowingly send a
signal regarding their ability to meet the contractual obligations. Higher premiums will be
observed in borrowers pledging lower collateral while lower premiums will be observed
for borrower pledging more collateral. However, there is the adverse signaling theory that
is a counter to the signaling theory and it postulates that firms perceived to be less risky
will pledge low or not premium.
2.1.3 Firm Characteristics
Lending institutions can study the characteristics of an individual firm and form unbiased
opinion about the firm’s future and ability to repay a credit advance. According to Ewert,
Schenk and Szczensy (2000) “there are firm-specific agency problems that can be
mitigated using collateral or such covenant and each firm chooses a financial contract
xix

that maximizes firm value by trading off additional bonding and monitoring costs against
reductions in interest rate premiums”. A firm-specific financial contract is thus made for
each firm depending on the perceived problems of the firm in question, and the use of
collateral by a specific firm can be observed to reduce the credit costs (high interest
premiums). However, such conclusion will most likely not hold for many firms because,
as mentioned before, there are high-risk firms that will offer valuable collateral and
probably accept high premiums.
2.1.4 Loan Pricing Theory
This theory explains why it is not prudent for banks to set very high interest rates to
optimize profit from loan sales. If banks set up very high interest rates, they could induce
the problem of adverse selection and moral hazard by attracting borrowers with very
risky. The counter-argument to this is that the willingness of a borrower to give
additional collateral may be a signal of weak investment fundamentals that necessitates
additional comfort to the lender. This study has not tested this proposition, thus makes no
recommendations in that regard. Collateral Lending: Are there Alternatives for the
Kenyan Banking Industry? Projects into their portfolio. The high interest rates would
later act as an incentive for the risky borrowers to consider adding more risk to their
investment portfolio due to high affinity for high returns
2.2 Gaps in the Theories
2.2.1 Critic of Credit Market clearing (neo-classical) theory
This theory does not explicitly discuss how collateral would impact on the risk premium,
it creates the impression that collateral has no effect on lending rate, and if a risky
borrower would wish to face the same lending rate as a borrower with a lower risk, then
xx

all that is required is to pledge more collateral to lower his risk profile and therefore
enjoy a lower risk premium. This brings about the ‘moral hazard’ and ‘adverse selection’
phenomena, firstly because of information asymmetry existing between the lender and
borrowers.
2.2.2 Critic of Signaling Argument
There is the adverse signaling theory that is a counter to the signaling theory and it
postulates that firms perceived to be less risky will pledge low or not premium.
2.2.3 Critic of Firm Characteristics
The conclusion observed from this theory will most likely not hold for many firms
because, as mentioned before, there are high-risk firms that will offer valuable collateral
and probably accept high premiums.
2.2.4 Critic of the Loan Pricing Theory
The counter-argument to this is that the willingness of a borrower to give additional
collateral may be a signal of weak investment fundamentals that necessitates additional
comfort to the lender.
2.3 Critical Review of Empirical Studies
2.3.1Effects on lending services
Access to debt financing entails the firm’s ability to get and use financial services that are
affordable, usable and meets its needs (Claessen, 2006).According to Musamali and
Tarus (2013), access to finance is measured in terms access to certain institutions such as
banks, micro-finance or services that these institutions provides
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2.3.2 Loaning period and Performance of MFIs
According to Coco (2000), collateral is the lenders second line of defense which can be
used the firm to solve the problem of asymmetry in valuation of project’s risks and the
cost of supervising the borrowers behavior. Coleman(2000) pointed out that many MSEs
are in service industry and lacked assets that could be used as a collateral .Thus firms
that invested heavily in tangible assets tended to have a higher financial leverage as they
could borrow at lower interest rates given that the debt is fully secured with such assets
(Barbosa and Moraes, 2004). Bongheas et al ( 2005), collateral is an important factor for
MSEs in order to access debt finance as it reduces the riskiness of the loan by giving
lenders claims on tangible assets.
2.3.3 Repayment terms and Performance of MFIs
Studies by Stigliz and Weiss (1981) revealed that information asymmetries and imperfect
information made lenders provide insufficient credit to all sound or bankable
propositions. Sarapaivanich and Kotey (2006), lack of adequate information led to
information asymmetry and credit rationing .According to Kitindi et al (2007) creditors,
banks and lenders used financial information provided by firms to analyze their
performance and predict future performance. For technology based firms, entrepreneurs
were reluctant to provide full information about the opportunities as their disclosure
could make it easy for others to exploit (Shane and Cable, 2002). Kinyanjui (2006)
pointed out that, it was difficult to obtain a loan as MSEs had to show credit records
which some did not fully understand the requirements of getting and paying loans.
Cochran, (1981) established that MSEs were relatively new and lacked a track record on
profitability to prove their ability to repay loans.
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2.3.4 Security policy and Performance of MFIs
Education is one of the factors that impact positively on the growth of firms (Kings and
Mc Grath, 2002). Entrepreneurs with large stock of human capital in terms of education
and training are better placed to adapt their enterprises to changing business environment.
According to Hisrich and Drnovsek (2002) managerial competence as measured by
education, managerial experience and knowledge of business positively affects MSEs’
performance. Martin and Staines (2008) established that lack of managerial experience,
skills and personal qualities led to MSEs’ failure in South Africa. According to Women
entrepreneurs (2008), education for women is low thereby creating a barrier to accessing
other business development services According to Abor (2008) women owned businesses
are less likely to use debt due to discrimination and greater risk aversion. Women owned
firms in the USA had a higher loan denial rates and lower application rates than their
male counter parts, Mijid (2009).
2.4 Knowledge Gap
The purpose of the research was to find out the effect of lending services on performance
of microfinance institutions in Kenya: a case of women finance trust, Bungoma County.
xxiii

CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design
The study adopted a descriptive research design. Descriptive research design was used
because the researcher had no control over the study variables and reported only what
was happening (Kothari, 2004).
3.2 Target Population
This was the population which the researcher based his study to generalize the results.
The target population for the study was all employees of Kenya finance trust.
3.3 Description of Research Instruments
The study used questionnaires as data collection instrument.
3.4 Description of Sample and Sampling Procedure
The random sampling involves selection methods in which all members of the sample are
chosen through a random process with each member of the population having known,
non-zero chance of being included (Olufunso,Herbst and Lombard, 2010). A simple
random sampling was used to draw a sample of ten of the population.
xxiv

1.5 Description of Data Collection Procedure
The researcher obtained an introduction letter from the Universities that he used to
introduce himself to the respondents from whom he collected data by use of
questionnaires in person.
3.6 Description of Data Analysis Procedures
The data collected were analyzed using descriptive statistics. Descriptive analysis
involves collection, summarizing, and presentation of a set of data to make it easy for the
researcher to conduct and users to understand (Kolb, 2008). Data was presented using
tables.
xxv

CHAPTER FOUR
PRESENTATION, DISCUSISION AND INTERPRETATION OF FINDINGS
4.1 Presentation of Findings
The chapter examines the study sample demographic characteristics in terms of gender,
age, level of education, training and managerial experience of firm’s owner.
4.1.1Response Return Rate
The researcher distributed a total of 10 questionnaires and 10 were returned making
response rate of 100%.
4.1.2 Demographic Characteristics
The study sought to determine the demographic characteristics of respondents based on
gender, and level of education.
4.1.2.1 Gender of the Respondents
The gender of the respondents was sought since its findings would assist the study to
categorize respondents based on gender as shown in table 4.1
Table 4.1 Gender of the respondents
Gender Frequency Percent (%)
Male
Female
6
4
60
40
Total 10 100
As portrayed in table 4.1 above 60% of the respondents were male and 40% were female.
xxvi

4.1.2.2Level of education of respondents
The level of education respondents was sought since its findings would assist the study
categorize respondents based on level of education as shown in table 4.2
Table 4.2 level of education of the respondents
Level of Education Frequency Percentage
Diploma 6 60
Degree 4 40
Total 10 100
As portrayed in the table above the number of respondents had an education level up to
Diploma with 6 (60%). This agrees with Bowen, Morara and Mureithi (2009) assertion
that MSEs are dominated with people with relatively low education level. Moreover
highly educated people may have other jobs rather than be involved in business.
4.1.3 Loaning period and Performance of Kenya Women Finance Trust
Investigation to determine the effects of loaning period and performance of Kenya
women finance trust revealed that 3 (30%) of respondents were in agreement that loaning
periods did not affect the performance of firm, while 7 (70%) asserted that loaning period
affected the performance of the firm. Therefore it was opined that loaning period
influenced the performance of microfinance institutions and the findings are shown in
table 4.3
Table 4.3 Loaning Period and Performance of Kenya Women Finance Trust
xxvii

Effect of loaning Period
Frequency Percentage (%)
No effect 03
Has effect 70
30
70
10 100
The statistics in Table 4.3 showed that majority of respondents 7 (70%) indicated that
loaning period affected the performance of microfinance institutions.
4.1.4 Repayment terms and Performance of Kenya Women Finance Trust
The study sought to determine whether the loan repayment terms affected the
performance of Kenya women finance trust. The findings revealed that 4 (40%) of
respondents asserted that it did not affect the performance of the firm, while only 6 (60%)
indicated that it affected the performance of the firm and the findings are shown in table
4.4
Table 4.4 Repayment terms and Performance of Kenya Women Finance Trust
Affected
Frequency Percentage (%)
YES 06
NO 04
60.0
40.0
10 100
As depicted in the Table 4.4, majority of respondents 6 (60%) were of the opinion that
loan repayment period affected the performance of microfinance institutions.
xxviii

4.1.5 Security policy and Performance of Kenya Women Finance Trust
The study also sought to find out whether loan security policy affected the performance
of Kenya women finance trust and the findings showed that 1 (10%) of the respondents
showed that it did not while 9 (90%) opined that it affected the performance of Kenya
women finance trust. The findings are shown in table 4.5
The table 4.5 Security policy and Performance of Kenya Women Finance Trust
Affected
Frequency Percentage (%)
YES 09
NO 01
90.0
10.0
10 100
As portrayed in the Table 4. 5 above, the bulk of the respondents 9 (90%) asserted that
loan security policy affected the performance of microfinance trust.
4.2 Discussion of Findings
Investigation to determine the effects of loaning period and performance of Kenya
women finance trust revealed that 3 (30%) of respondents were in agreement that loaning
periods did not affect the performance of firm, while 7 (70%) asserted that loaning period
affected the performance of the firm. Therefore it was opined that loaning period
influenced the performance of microfinance institutions. Pandey (2010) defines credit
standard as the method which is followed by a firm in selection of clients for credit
extension purpose. The firm can decide to give credit to only the most reliable customers
and those who are stable financially, it can also have stringent credit standards by mainly
xxix

selling on cash basis. This will result to less administration costs and no bad debt losses
but no much expansion on sales of the firm, hence less costs saved by the firm as
compared to the profit sacrificed on lost sales. Loose credit standards of the firm to large
sales but increases debtors and in turn credit administration costs and bad debt losses
increase. According to Van Home, (1994), customer worth is affected in two ways by
credit standards: the default rate and the period taken by clients to repay the loans taken.
He found out that optimum credit policy would lead to reduction of the tight and loose
weaknesses of credit standards raising the firm’s profitability. Kakuru (1998) showed that
the increase in return and increase in costs trade off influences choice of credit standards.
The study sought to determine whether the loan repayment terms affected the
performance of Kenya women finance trust. The findings revealed that 4 (40%) of
respondents asserted that it did not affect the performance of the firm, while only 6 (60%)
indicated that it affected the performance of the firm. Wamasembe (2012) describes
credit terms as the stipulation under which credit sales are made to clients by the firm.
The stipulations involve: cash discount and credit period. An industry culture and
practices can direct the credit period of a firm. The firm may widen the credit period or
shorten the credit time. A firm tightens credit period by increasing sales and extension of
credits hence increase in operating profits. With increased sales and extend credit period.
According to kakuru (1998), found out that cash discount boosts collections due from
customers and is used as a tool to increase sales. This will lead to the reduction in the
level of debtors and associated costs. Terms of credit in practice includes: the time of
cash discount, the net credit period and the cash discount period. Saleh and Zeitun (2007)
showed that credit period is the length of time taken to approve from the applicants to the
xxx

loan disbursement. Failure by customers to pay loan within a specified credit period
would result to bad debts. The credit terms are measured by determining cost of bad debt
arising when microfinance institutions agree to loan a sum of assets to a debtor with
expected repayment in a fixed period of time.
The study also sought to find out whether loan security policy affected the performance
of Kenya women finance trust and the findings showed that 1 (10%) of the respondents
showed that it did not while 9 (90%) opined that it affected the performance of Kenya
women finance trust. According to Kariuki (2010) to ensure regular and prompt
collection a collection policy is needed which should also aim at fastening the collection
from slow payers and reducing bad debt losses. Some customers are non payers
completely and others don’t even put the time factor in consideration, hence the policy of
collection caters for all these. He further found out that for fast turnover of working
capital, keeping costs of collection and bad debts within limits and efficient maintenance
of collection, prompt collection is needed. Pandey (1995) argued that policy of collection
should lay down clear methods of collection. Ineffective collection of loans depicts
inefficiency in management level. Inefficiency in distributing loans to customers is
therefore a policy that is determined through cost per loan asset as an average cost per
loan advanced to clients in monetary terms determined by total cost and total amount of
loans ratio.
4.3 Interpretation of the Findings
Investigation to determine the effects of loaning period and performance of Kenya
women finance trust revealed that 3 (30%) of respondents were in agreement that loaning
periods did not affect the performance of firm, while 7 (70%) asserted that loaning period
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affected the performance of the firm. Therefore it was opined that loaning period
influenced the performance of microfinance institutions.
The study sought to determine whether the loan repayment terms affected the
performance of Kenya women finance trust. The findings revealed that 4 (40%) of
respondents asserted that it did not affect the performance of the firm, while only 6 (60%)
indicated that it affected the performance of the firm. Therefore the loaning repayment
period affects the performance of microfinance institutions in Kenya.
The study also sought to find out whether loan security policy affected the performance
of Kenya women finance trust and the findings showed that 1 (10%) of the respondents
showed that it did not while 9 (90%) opined that it affected the performance of Kenya
women finance trust. Therefore the loaning security policy affects the performance of
microfinance institutions in Kenya.
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CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1Summary of the Findings
The study objective sought to establish the effect of lending services on performance of
micro finance institutions in Kenya: a case of women finance trust, Bungoma County.
The first objective determined the effects of loaning period and performance of Kenya
women finance trust revealed that 3 (30%) of respondents were in agreement that loaning
periods did not affect the performance of firm, while 7 (70%) asserted that loaning period
affected the performance of the firm. Therefore it was opined that loaning period
influenced the performance of microfinance institutions.
The second objective sought to determine whether the loan repayment terms affected the
performance of Kenya women finance trust. The findings revealed that 4 (40%) of
respondents asserted that it did not affect the performance of the firm, while only 6 (60%)
indicated that it affected the performance of the firm. Therefore the loaning repayment
period affects the performance of microfinance institutions in Kenya.
The third objective sought to find out whether loan security policy affected the
performance of Kenya women finance trust and the findings showed that 1 (10%) of the
respondents showed that it did not while 9 (90%) opined that it affected the performance
of Kenya women finance trust. Therefore the loaning security policy affects the
performance of microfinance institutions in Kenya.
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5.2 Conclusions
The study objective sought to establish the effect of lending services on performance of
micro finance institutions in Kenya: a case of women finance trust, Bungoma County.
The first objective determined the effects of loaning period and performance of Kenya
women finance trust and it was opined that loaning period influenced the performance of
microfinance institutions.
The second objective sought to determine whether the loan repayment terms affected the
performance of Kenya women finance trust. The findings revealed that loaning
repayment period affects the performance of microfinance institutions in Kenya.
The third objective sought to find out whether loan security policy affected the
performance of Kenya women finance trust and the findings showed that loaning security
policy affects the performance of microfinance institutions in Kenya.
5.3 Recommendations
The purpose of this research was to explore the effect of lending services on performance
of microfinance institutions in Kenya: a case of women finance trust, Bungoma County.
The researcher recommends the following measures that may hopefully spur the growth
of MFIs through debt financing. MFIs should adopt the loaning period that will be
convenient to the firm and the customers so as to spur their growth. The firms should also
come up with repayment periods that favour the organizations as well as their customers
to increase the customer base and lastly the loan security policy should allow customers
to access loans at reasonable interest rate to build the customer base.
xxxiv

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Financial Review, Vol.3(2)
APPENDIX ONE: QUESTIONNAIRE FOR RESPONDENTS
Thanks for participating in this survey
Section A: Background information
Please put a tick(√) or give a brief explanation
1 Indicate your gender
( ) Male ( ) Female ( )
2 Indicate your level of education
Below KCPE ( )
KCPE ( )
KCSE ( )
Diploma ( )
Bachelors ( )
Section B: Board size
3 Do you a board of management
Yes ( )
No ( )
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2 If Yes as in 3 above, how is the board size
Small in size ( )
Large in size ( )
4Which board size is appropriate for cooperative societies?
Small in size ( )
Large in size ( )
5Does your cooperation have non executive members?
Yes ( )
No ( )
6 Do non-executive members play a key role in the management of the societies?
7 Which shareholding is beneficial to the financial growth of cooperative societies?
Small shareholders ( )
Large shareholders ( )
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