THE ROLE OF MICROFINANCE INSTITUITIONS IN ALLEVIATING

POVERTY IN PASTROL COMMUNITIES IN KENYA

(A CASE STUDY OF GARISSA COUNTY)

BY:

ISMAIL SALAT ONLE

BBM/2493/16

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENTS FOR THE AWARD OF A BACHELOR’S
DEGREE IN BUSINESS MANAGEMENT OF MOI UNIVERSITY.

( BANKING AND FINANCE OPTION)

 DEC, 2018

DECLARATION
Student’s DeclarationDeclaration by the Student

I declare that this research project is my original work and has not been presented in any other
university.

Signed Date

ISMAIL SALAT ONLE

BBM/2493/16

Supervisor’s DeclarationDeclaration by the Supervisor

This research has been submitted for examination with my approval as university supervisor.

Signed Date

Mrs.NANCY KIRAGU OMONDI

Department of Business Management

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 DEDICATION
I dedicate this project to my Uncle MahatSomane and my loving mother Habiba Abdi Ali who
interest and sacrificed themselves to my earlier education and until now who have continued to
support me. Forever I will be grateful to them. Special thanks to my sister FatumaSalat and my
best friend of all times ShukriDaud Ahmed and also the staffs of MFIs in Garissacounty for the
inspiration and continued support through writing this project. Without them it could not have
been possible to accomplish this task.

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 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to the Almighty Allah for this sufficient grace,
secondly to my supervisor, Mrs. Nancy Kiragu. Finally to my friends and colleagues who have in
one way or the other assisted in the course of working out this document. To all of you, thank
you and May God bless you.

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 ABSTRACT
The people of Garissa County have for a long time lived amidst abject poverty where they earned
their livelihood from pastoralism at the subsistence level. The majority of the people in this area
were victims of the drought in Northern Kenya. Most people in trading centers within the county
are crafts men, bicycle and taxi drivers while the women are petty traders.

Generally, the majority of the people of Garissa County live in abject poverty and it is for this
reason that a study had to be conducted to suggest ways as to how poverty can be alleviated from
amongst the pastoral communities of Garissa County and also the way forward for maintaining
better living standards. This was the purpose of the research.

The researcher used interviews, observation and questionnaires as research instruments to collect
adequate data to study the role of microfinance institutions in poverty alleviation in pastoral
communities and Garissa County was used as a case study.

The findings of the study were that; the majority of the people who acquired the credit facilities
from the MFIs had their income increased and as well improved their standards of living as
some respondents stated that they can now afford the basic necessities of both rural and urban
life.

The key recommendation suggested by the researcher was that; there should be capacity building
in MFIs and other lending institution to enhance their capacity in the design of policies,
procedures and products that meet the practical and strategic gender needs of the pastoral
communities. This will enhance the participation of both men and women in micro-credit
programs thereby leading to poverty alleviation through increased access to both production and
consumption credit. This can be achieved through coming up with capacity building plan.

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vi
 ABBREVIATIONS

GoK Government of Kenya

MFIs Microfinance Institutions

MSEs micro and small enterprises

NGOs Non-Governmental Organizations

KIHBS Kenya Integrated Household and Budget Survey

TIAPD Tegemeo Institute of Agricultural Policy and Development

PEIK Poverty and Environment Institute- Kenya

KNBS Kenya National Bureau of Statistics

PEAP Poverty Eradication Action Planing

WB World Bank

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 TABLE OF CONTENTS
DECLARATION.............................................................................................................................ii
DEDICATION...............................................................................................................................iii
ACKNOWLEDGEMENT..............................................................................................................iv
ABSTRACT....................................................................................................................................v
ABBREVIATIONS........................................................................................................................vi
TABLE OF CONTENTS..............................................................................................................vii
LIST OF TABLES..........................................................................................................................xi
LIST OF FIGURES.......................................................................................................................xii
CHAPTER ONE............................................................................................................................1
1.0 INTRODUCTION.....................................................................................................................1
1.1 Background of the study............................................................................................................1
1.2 STATEMENT OF THE PROBLEM.........................................................................................3
1.3 Objective of the Study..........................................................................................................3
1.3.1 General Objective............................................................................................................3
1.3.2 Specific Objectives...........................................................................................................3
1.4 Research Questions....................................................................................................................3
1.5 SIGNIFICANCE OF THE STUDY..........................................................................................4
1.6 SCOPE OF THE STUDY..........................................................................................................4
CHAPTER TWO...........................................................................................................................5
2.0 LITERATURE REVIEW..........................................................................................................5
2.1 INTRODUCTION.....................................................................................................................5
2.2 THEORETICAL REVIEW.......................................................................................................5
2.2.1 Microfinance...........................................................................................................................5
2.3 EMPERICAL REVIEW............................................................................................................6
2.3 RESEARCH GAP.....................................................................................................................6
2.4 CONCEPTUALIZATION.........................................................................................................6
2.4.1 Savings....................................................................................................................................6
2.4.2 Micro-credit............................................................................................................................7
2.4.3 Insurance.................................................................................................................................7
2.4.4 Money management................................................................................................................7

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2.4.5 Leasing/Hire purchase............................................................................................................7
CONCEPTUAL FRAMEWORK....................................................................................................8
2.5 Operational Framework.............................................................................................................9
CHAPTER THREE.....................................................................................................................10
3.0 RESEARCH METHODOLOGY............................................................................................10
3.1 INTRODUCTION...................................................................................................................10
3.2 RESEARCH DESIGNS...........................................................................................................10
3.3 STUDY POPULATION..........................................................................................................10
3.4 SAMPLING DESIGNS...........................................................................................................11
3.5 DATA COLLECTION AND INSTRUMENT........................................................................12
3.6 DATA ANALYSIS AND PRESENTATION.........................................................................12
3.7 LIMITATION OF THE STUDY.............................................................................................13
3.8 ETHICAL ISSUES..................................................................................................................13
3.9 EXPECTED OUTCOME........................................................................................................13
REFERENCES..............................................................................................................................14

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LIST OF TABLES
Table 3.1
Table 3.2
Table 4.1: Analysis of the response Rate
Table3: Respondents according to their Age
Table4: Respondents according to their Gender
Table5: Respondent According to level of Education
Table 6: Programs of Equity Bank on Microfinance
Table 7: Credit facilities offered by MFIs in Garissa
Table 8: Uses of borrowed funds by the respondents of the questionnaires
Table 9: Some of the activities of six families from the 4 location concerning effects of the loans
acquired from Equity Bank
Table 10: Some of the number of respondents in the 4 locations who have engaged in saving
their income with the microfinance institution
Table 11: Clients who located loans to other institutions
Table 12: Motivations received by the respondent of the interview

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LIST OF FIGURES

Figure 1: No of respondents
Figure 2.Respondents according to their age
Figure 3: Respondents according to their Gender
Figure 4: Level of Education
Figure 5: The kinds of loans acquired
Figure 6: Number of savers with Equity Bank Microfinance

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 CHAPTER ONE

1.0 INTRODUCTION
This chapter presents the background of the study, the problem statement, and the objectives of
the study, the research questions and the significance of the study.

1.1Background of the study

Modern microfinance emerged in late 1970s with a strong orientation toward private sector
solution. This resulted from evidence that state own agricultural development banks in
developing countries had been a monumental failure, actual undermining developments goals
they were intended to serve (Adams 1984). Nevertheless public officials in many countries had
different view and continue to intervene in microfinance marks.

Microfinance refers to the provision of financial services to low income clients, including
consumer and self employedLidgerwood (2000).Microfinance services can bring substantial
benefits to herders, and could play an important role in pastoral risk management as well as in
pastoral development more generally. Savings and micro-credit can smooth consumption
seasonally and between years. Credit can help herders replace livestock after drought. Micro-
insurance can protect herders from such losses in the first place. Credit can allow productive
herding enterprises to expand, diversify household income and reduce vulnerability to future
shocks. An underrated benefit of micro-finance is the substantial social capital created by the
experience of working with others in an arena where trust is essential.

However herders have so far benefited little from micro-finance programmes. There are
difficulties in targeting micro-finance to herders: the herding economy and herding society is
little understood by micro-finance providers, herders are mobile, and do not have conventional
collateral and there is little experience of micro-finance for herders in other counties to guide
planners.

The success of a micro-finance strategy depends on the ability of the parent institution to find the
right balance between achieving financial sustainability, without which any gains will be short-

1
lived, and targeting benefits to clients at affordable rates. If micro-finance institutions (MFIs)
providing financial products to herders cannot earn revenues that exceed costs, without long-
term subsidies (either from government or donors), they will not provide a sustainable solution to
the problems faced by herders. Equally, if micro-finance does not reach a significant number of
herders, including poor households, its development potential will be limited. Community-based
micro-finance can be a transition from pilot projects to the mainstream.

In Kenya, a nation-wide survey carried in 2006, Kenya Integrated Household and Budget
Survey, (KIHBS) finds that 46% of the total Kenyan population is absolutely poor, i.e. below the
poverty line, whereas 49% of the rural population is absolutely poor (Kenya National Bureau of
Statistics, 2007).The 1997 Welfare Monitoring Survey showed a poverty rate of 57% overall and
60% in the rural population. There has, therefore, been some reduction in poverty across the
country and across rural areas over the last decade. National poverty rates fell from 52% to 46%
in the decade to 2006. There are still high levels of income poverty in Kenya and the gap
between the richest and poorest households widened by 20% during this period. (DFID 2009/10)
TIAPD (2008) affirms that Poverty in Kenya manifests itself in various forms including: income,
lack of equal access to productive assets, social and political exclusion, and inability of certain
groups of the society to access key social services.

Garissa County is in former North Eastern province in Kenya. It borders Wajir County to the
north and Tana River County from the south. Its capital and largest town is Garissa district.
Administratively it has seven districts namely Ijara, Garissa, Fafi, Lagdera, Dujis, Hulugho and
Balambala.Garissa County also consist of six constituencies namely Township, Balambala,
Dadaab, Lagdera, Ijara and Fafi constituencies.
It had a population of 623,060 according to national census of 2009; it has 98,590 Household and
covers an area of 44,170SQ.KM. The population density is 14 per SQ.KM and unfortunately
over 54.5% of the population live below poverty line The population main economic activity is
livestock rearing. They keep all classes of livestock which include cattle (mainly Boran, zabu,
sahiwal), Camels, Goats (mainly Galla and small east African), Sheep (mainly black head
Persia), poultry and donkeys (Census 2009).

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1.2 Statement of the Problem
Garissa County is one of the drought ravaged county in North Eastern Kenya with majority of
the inhabitants falling in the circles of abject poverty as a result of the civil strives, for example,
clan wars and other economic factors. The people in this area are caught up in the circles of
poverty where symptoms such as diseases and malnutrition leading to poor health, high infant
mortality, close to zero agricultural output as a result of inadequate resources to facilitate small
or large scale production, starvation and high illiteracy rate due to lack of finance to facilitate
education in Garissa County is a common phenomenon.
The microfinance institutions could be perceived as the way forward to the development of the
communities in Garissa County especially when they gain access to credit facilities. However,
the roles of these institutions in poverty reduction are yet to be ascertained.

1.3 Objective of the Study

1.3.1 General Objective

The primary objective of this study was to determine the role of micro financing in alleviating
poverty in pastoral communities in Garissa County.

1.3.2 Specific Objectives

i) To find out if the microfinance strategies that are used in the institutions are specific to
pastoral communities
ii) To find out if the microfinance strategies are easy to implement
iii) To describe how achievable the strategies are
iv) To evaluate if the strategies used are implemented through pastoralists. This is to
establish if they use the strategies to all pastoralists
v) To know if the strategies being used are in line with mission and vision of microfinance
institutions

1.4 Research Questions

i) What strategies are used in alleviating poverty in pastoral communities?
i) Are the credit strategies used by MFIs easy to implement?
ii) How are the strategies in line with microfinance institutions?

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 iii) Are the strategies implemented throughout the pastoral communities?

1.5 Significance of the Study

The beneficiaries of this study are the micro financing institutions. From findings of this study
other organizations are able to know the role of microfinance and through findings they will be
able to formulate comprehensive financing strategies to use in arid and semi arid areas.

1.6 SCOPE Areaof the Study.

This study was confined to micro financing institutions. The study evaluated the impact of micro
financing strategies in pastoral communities.

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 CHAPTER TWO

2.0 LITERATURE REVIEW

2.01 INTRODUCTION
This chapter will review the necessary information about the role of microfinance institution in
poverty alleviation in various communities or societies. This will in essence enable the
researcher to give a critical analysis of these strategies.

2.21THEORETICAL REVIEW

2.2.1 Microfinance
According to Imboden (2005), Microfinance is the provision of loans, savings, insurance,
payments, and other basic financial services to low-income populations. Microfinance activities
usually involve small loans (typically for working capital), employ collateral substitutes,
streamline procedures, and offer swift and frequent access. Microfinance clients are typically
self-employed, low income entrepreneurs and households in both urban and rural areas.

These are the institutions that have been set up by government or private sector and Non-
governmental organizations to undertake the financial roles such as safe guarding funds,
provision of credits, accepting cash among others. It is through this that microfinance institutions
managed to expand their activities to alleviate the poor communities from adverse cycles of
poverty to economically self-sustaining communities.

Yunus (1994), stated that if we are looking for a single action which will enable the poor to
overcome poverty, I would go for credit from microfinance institutions, money is power. Credit
invested on an income generating enterprise as a working capital leads to establishment of
programs to alleviate poverty.

The success of microfinance strategy depends on the ability of the parent institutions to find the
right balance between achieving financial sustainability without any gains will be short-lived and
targeting benefits to clients at affordable rates. If micro-finance institutions (MFIs) providing

5
financial products to herders cannot earn revenues that exceed costs, without long-term subsidies
(either from government or donors), they will not provide a sustainable solution to the problems
faced by herders. Equally if microfinance does not reach a significant number of herders
including poor households, its development potential will be limited. Community-based
microfinance can be a transition from pilot projects to the mainstream.

2.3 EMPERICAL REVIEW

To implement service strategy, the service provider (MFI’S) has to build customer (Pastoral
community) relationships and loyalty. Microfinance strategies should be effective if the firm has
plans for credit recovery and create customer (herders) feedback system. For microfinance
strategy to be profitable it has to continuously improve service quality and productivity in order
to maintain its customers. (Witz 2003)

2.3 RESEARCH GAP

Based on the literature that has been collected there is a gap in the study. Most authors who
discussed role of microfinance in alleviating poverty in pastoral communities did not emphasize
on microfinance institutions.

2.4 CONCEPTUALIZATION
The study focuses on five independent variables. These are various factors that microfinance
institutions implements on pastoral communities to alleviate poverty. These include savings,
micro-credit, insurance, training and money management.

2.4.1 Savings
Herders’ income streams depend on highly seasonal events like milk or animal sales and their
demand for cash is also highly seasonal. Cash savings would allow herders to smooth these
uneven income and consumption streams. At present there are no savings product designed with
herders’ needs and constraints in mind. It would be wise to develop savings mechanisms for
herders before further expanding micro-credit schemes and in future ensures that saving
mobilization and micro-credit go hand in hand.

6
2.4.2 Micro-credit
Micro-credit has grown rapidly in rural areas of many developing counties. However high loan
rates (Interest rates) are due to combination of low levels of deposits, shortage of funds, high
lending transaction of costs, and a perception by banks that lending to small clients is risky.

Most micro-credit schemes target small and established traders and farmers. They are not
targeted at herders or the poor for production activities. Loan conditions-short loan duration,
high interest rates and a need for collateral-are not attractive to herders. Some institutions are
experimenting with innovative products for clients other than traders and urban entrepreneurs.
However few products reach herders.

2.4.3 Insurance
Herders face several types of risk to their livestock which include drought, raiding, epizootic
diseases and also weather. A general strategy to develop herder micro-insurance should be
promoted where possible. Microfinance institutions should offer well designed livestock
insurance scheme that favors both the insurer and herders.

2.4.4 Money management

This is the need of financial planning service including life cycle financial products such as life
and health insurance, pension and accident insurance by herders.

2.4.5 Leasing/Hire purchase

Some items of equipments needed by herders are large and expensive. Examples are borehole
genets or solar pumps. It would be worth experimenting with financial products that enable
herders to acquire such capital assets through lease or can even lease their animals for a period of
time to an organization and later share the profits.

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CONCEPTUAL FRAMEWORK

Savings

Micro-credit Role of microfinance

institutions in pastoral
Insurance
communities

Money
Management

Leasing/hire
purchase

Independent variable Dependent variable

Source (Author 2016)

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2.5 Operational Framework

Amount of saving

Savings

Age of saving

Loans offered
Micro-credit

Interest rates

Premiums
Insurance

Moral Hazards
insured against

Financial Planning
Money Management

Security of MFIs

Leasing/Hire purchase Capital Assets

Credit History

Independent Variables Parameters

Source (Author 2016)

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 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.10 INTRODUCTION
The research methods are outlined in this chapter. This chapter is under the following headlines;
Introduction, target population, sampling design, data collection procedures and data analysis
procedures.

This research will try to give an account of how microfinance strategies are implemented on
pastoral communities to alleviate poverty. The research is also supposed to illustrate the impact
and challenges that affect pastoral communities when microfinance strategies are used on
pastoral communities.

3.1 2 RESEARCH DESIGNS

Research design is the plan used to outline how information is gathered, the data gathering
methods, the instruments administered, organized and analyzed Coopers and Schindler, (2003)
the research design employed in this study is descriptive in nature. The research was based upon
the staffs and customers of microfinance institution in the four locations i.eKorkora, Central,
Sankuri and Saka. Both qualitative and quantitative methods was used during the study on the
role of microfinance institution in poverty alleviation in pastoral communities of Garissa County.
A semi-structured interview was used especially to the target population whose levels of
education are very low.

3.3 STUDY POPULATION

Population is a summation of all the organisms of the same group or species, who live in the
same geographical area(Wikipedia) The population of interest consists of fully staff and
customers of microfinance institution in Garissa County. Questionnaires were distributed among
the staffs working in microfinance institution and the customers.

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Table 3.1
Numbers Name of Location Target population Percentage (%)
1 Central 20 40

2 Sankuri 10 20
3 Korakora 10 20
4 Saka 10 20
Total 50
Source Author 2016

3.4 SAMPLING DESIGNS

A sampling method is any technique that is used in selecting an appropriate sampling size. There
are two sampling methods namely; probability and non-probability. Simple random sampling
method will be used. This technique ensures that every element has an equal chance of
participating in the study. The reason of using this technique in this research is because the staff
of the institution will be busy and as a researcher there is no control of which staffs will be seen.
In addition the researcher will have no control of the sales personnel since most of the time they
are in the field selling their product hence there will be the need of using the simple random
sampling method.

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Table 3.2
Location Targeted population Sample size Sample %

Central 20 15 75%

Sankuri 10 8 80%

Korkora 10 8 80%

Saka 10 7 70%

Total 50 38 76%

Source Author 2016

3.5 Data Collection AND INSTRUMENT

Primary data-this is factual data to be collected for the first time to address the problem at hand.
The researcher will use questionnaires to collect data. This will consist of set questions to be
presented to the respondents for their answers. The researcher will use the questionnaires as they
are the most common instruments used in primary data collection because they are simple in
nature if well structured. The questionnaires will take different forms depending on the type of
information required. Standard form questionnaires will be utilized to attain information which
will be used for the purpose of comparison. Others will be close ended which will permit free
responses from the respondent without providing or suggesting any structure for the replies. The
closed questions will enable response for the respondent to be simple to understand. This method
enables the researcher to isolate the responses from external influences.

3.6 Data AnalysisS AND PRESENTATION

After the feedback and before analysis all the questions will be adequately checked. This will be
done through scrutiny so as to minimize the variations in case missing responses, multiple entries
or blank questionnaires. Exploration analysis will be performed to ensure that the output will be
free from authors. For a case reference the data will be analyzed using quantitative and
qualitative techniques. The data will be presented by using pie charts, bar charts and tables for
ease of reference.

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3.7 Limitation of the Study
The researcher may be limited by lack of cooperation during the filling of the questionnaires.
Most participants especially the staffs will be attending to their clients and therefore may limit
the time allocated or ignore the exercise all together. Conversely some appointments may take
long to be accepted especially by staffs and customers. Another limitation may be the people
refusing to be interviewed. I will minimize the limitation by informing the participants that
everything gathered in this research will be handled in confidentiality.

3.8 Ethical Issues

The research upheld some ethical issues in the process of the study. The researcher designed the
questionnaires with objective questions for the respondent privacy with their physical and
psychological needs. The researcher will guarantee the respondent confidentiality on any
information that they will volunteer on the questionnaires. Question will be taken to optimize the
time taken by each party to respond to the questions because it may be costly to the researcher.

3.9 Expected Outcome

Upon successful completion of the study, the expected outcome will be the researcher hopes to
arrive at a decision. This is to ascertain whether the strategies on poverty alleviation are
implemented by microfinance institutions are effective and acquiring its target.

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 REFERENCES

Adams,DaleW.,DouglasH.,Graham&J.D.VonPischeke[eds].Undermining Rural Development

with cheap credit.westview press, builder &London,1984

Coopers and Witz, P.S. (2003). Business Research Methods. 8th Ed. New York: McGrawhill

Association of Microfinance institutions of Kenya, 2011, Association of Microfinance

institutions of Kenya, Nairobi, viewed on 20th September 2011, www.amfikenya.com

Kenya. African Journal of Business & Management (AJBUMA), 1, pp 55-69.Nairobi: Aibuma

Publishers.

Ledgerwoodet al, (2002). The Ugandan Microfinance Industry: Prospects for Regulation.
Journal of Ugandan Institute of Bankers, 10 (4), pp 21-25

Yunus, M. (1994). “Grameen Bank: As I See It.” The GrameenReader.Ed. David S. Gibbons.
2nd ed. Dhaka: Grameen Bank, 62-98.

Yunus, M. (1997). Grameen Bank Story: Micro lending for economic development. Dollars
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Imboden, K (2005). Building Inclusive Financial Sectors: The Road to Growth and Poverty
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Kenya National Bureau of Statistics, 2011, Kenya National Bureau of Statistics, Nairobi, viewed
on 20th September,2011, www.knbs.or.ke

Omino, G. (2006).Regulation and Supervision of Microfinance Institutions in Kenya.Central

Bank of Kenya.

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Rhyne, E., &Otero, M. (1984). “Financial Services for Microenterprises: Principles and
Institutions.” World Development 20 (11): 1561–71.

The 2005/06 Kenya Integrated Household Budget Survey, First Quarterly Report, Basket
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World Bank,(2007). Impact Evaluation for Microfinance: Review of Methodological Issues.

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World Bank.(1998).World Bank operational manual OP 8.30-Financial Intermediary World

Bank.(2006).World Development Report 1990.Oxford University

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