Challenges Affecting Transformation of Microfinance Institutions into Deposit Taking Financial Institutions in Kenya

Abstract

With the enactment of the Microfinance Act of 2006 and issuance of the regulations to enforce it, MFIs in Kenya were for the first time provided with a legal framework within which to transform specifically into deposit taking microfinance institutions (DTMs). Previously, the only available option in Kenya was for them to transform into commercial banks. Evidence from countries like Bolivia and Peru indicate that the transformation process is not easy as MFIs face a variety of challenges not only when planning for but also during transformation process. However, this available information is not conclusive on the relative significance of each of those challenges in transformation of MFIs. Besides, the main model previously tried in Kenya and other countries involved transformation of MFIs into commercial banks. This study, therefore, sought to determine the specific challenges affecting transformation of MFIs into deposit taking financial institutions in Kenya. The objectives of the study were to determine how planning, legal compliance, management of stakeholders, and institutional change management affect the transformation of MFIs into DTMs in Kenya.

This study used the cross-sectional survey research design. The target population of the study was 48 MFIs that were members of the Association of Microfinance Institutions in Kenya (AMFI) as at 1 st January 2013. The study purposively sampled 25 MFIs from which 100 respondents were randomly selected. A questionnaire was used to collect data. Data entry, storage and analysis were done with the aid of Scientific Package for Social Sciences (SPSS). The data was first explored for the underlying factor structure among the study variables through factor analysis. Thereafter, the study undertook both descriptive and inferential statistical analyses. In particular, the study used the mode, Pearson Chi-square and Direct Logistic Regression to analyse the data.

The study established and concluded that planning was not a significant challenge affecting the transformation of microfinance institutions into deposit taking institutions in Kenya. The study also concluded that legal compliance and institutional change management were significant challenges affecting the transformation of microfinance institutions into deposit taking institutions in Kenya. This study further concluded that management of stakeholders was not a significant challenge affecting the transformation of microfinance institutions into deposit taking institutions in Kenya.

The study recommended that MFIs wishing to transform in Kenya should allow themselves adequate time so as to understand fully the environment and the legal and regulatory framework. This entails committing a lot of time and resources to planning and initial preparations. Transforming MFIs also need to understand the complete licensing process in order to be prepared well. The study recommended further research to determine the impact of Microfinance regulation in Kenya, compare the experience of newly created DTMs and those that have transformed with the process of registration and licensing. This study recommended a review the policy and law to allow for phased transformation. The policy and law should also be reviewed to allow the transformed MFIs a tax holiday and exempt from tax any assets donated or transferred to the DTM by the mother NGO MFI.