EFFECT OF LENDING STRATEGY ON FINANCIAL PERFORMANCE OF

MICROFINANCE INSTITUTIONS IN KENYA

STUDENT NAMES

NANCY ROBI CHANGOLE HDB223-0519/2021

MICHELLE WAITHERA KIMOTHO HDB223-0557/2021

VIVIAN NJERI CHEGE HDB223-0529/2021

CYRUS LIADEVERA NDUNGU HDB223-0565/2020

A research project was submitted to the Department of Economics Accounting and

Finance in the School of Business and Entrepreneurship in partial fulfilment of the

requirements for the award of the BSc Banking and Finance of Jomo Kenyatta

University Of Agriculture and Technology.

i
 2024

DECLARATION

This project is our original work and has not been presented for a degree at any other
university.

NANCY ROBI CHANGOLE HDB223-0519/2020

…………………. …………………

Signature Date

MICHELLE WAITHERA KIMOTHO HDB223-0557/2021

…………………. …………………

Signature Date

VIVIAN NJERI CHEGE HDB223-0529/2021

…………………. …………………

Signature Date

CYRUS LIADEVERA NDUNGU HDB223-0565/2020

…………………. …………………

Signature Date

Declaration by supervisor

This project has been submitted for examination with my approval as University Supervisor.

Dr KALUNDU KIMANZI

……………… ……………….

ii
Signature Date

ACKNOWLEDGEMENT

We sincerely thank the Divine Creator for granting us wisdom and guidance throughout this

research journey. This endeavour would not have been possible without the above mentioned

blessings and inspiration. We sincerely appreciate our supervisor, Dr Kalundu Kimanzi,

whose unwavering guidance, expertise, and valuable insights have been instrumental in

shaping the course of this research. Your dedication and mentorship have been invaluable in

navigating the complexities of this study. We also warmly thank our friends and family

members who willingly completed the surveys and offered their time and perspectives. Your

contribution has been a cornerstone of this study, and we are deeply grateful for your support.

Finally, we acknowledge the collaborative efforts of our research team. Each member's

dedication, diligence, and teamwork have contributed to the fruition of this study. Together,

we have worked diligently to uncover insights that we hope will be valuable to financial

services marketing and customer engagement.

iii
 ABSTRACT
Microfinance institutions (MFIs) play a critical role in promoting financial inclusion and
economic growth in low-income communities. However, the performance of MFIs in Kenya
is influenced by various factors, including lending strategies, risk management practices, and
technology innovations. This study aims to investigate the impact of these factors on the
financial performance of MFIs in Kenya. Specifically, the study seeks to determine the effect
of customer segments on financial performance, examine the effect of risk management
practices on financial performance, and explore the effect of technology innovations in MFIs.
The study employed a mixed-methods approach, combining both qualitative and quantitative
data collection and analysis methods. A survey was conducted among a sample of 5 MFIs in
Kenya, which are licensed institutions. The survey instrument was designed to capture
information on the lending strategies, financial performance, and risk management practices
of the MFIs. In addition, 5 in-depth interviews were conducted with MFI managers and
officers to gain a deeper understanding of their lending strategies and challenges. The
findings of the study suggest that customer segments play a significant role in determining
the financial performance of MFIs in Kenya. Specifically, the study found that MFIs that
target low-income individuals and small-scale entrepreneurs tend to perform better than those
that target middle-income individuals. The study also found that risk management practices
have a positive impact on the financial performance of MFIs in Kenya. MFIs that adopt
robust risk management practices tend to experience lower levels of non-performing loans
and higher levels of financial performance. Furthermore, the study found that technology
innovations have revolutionized the way MFIs operate in Kenya. The adoption of digital
technologies such as mobile banking and online lending platforms has enabled MFIs to reach
a wider customer base, reduce operational costs, and improve efficiency. However, the study
also found that the
adoption of technology innovations is not uniform across all MFIs, with some institutions
lagging behind in terms of technological advancements.
The study's findings have implications for policymakers, regulators, and MFI managers. The
results suggest that policymakers should prioritize initiatives that promote access to financial
services for low-income individuals and small-scale entrepreneurs. Regulators should also
ensure that MFIs adopt robust risk management practices to minimize the risk of non-
performing loans. MFI managers should adopt technology innovations to improve efficiency
and reach a wider customer base.

iv
 TABLE OF CONTENTS
DECLARATION......................................................................................................................ii

ACKNOWLEDGEMENT......................................................................................................iii

ABSTRACT.............................................................................................................................iv

LIST OF TABLES..................................................................................................................vii

LIST OF FIGURES..............................................................................................................viii

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

INTRODUCTION....................................................................................................................1

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

1.1.1 Global Perspective.....................................................................................................3

1.1.2 Regional Perspective............................................................................................4

1.1.3 Local Perspective.......................................................................................................6

1.2 Statement of the Problem.................................................................................................7

1.3 General Objective.............................................................................................................8

1.3.1 Specific Objectives....................................................................................................8

1.3.2 Research Questions....................................................................................................8

1.4 Justification of the study...................................................................................................8

1.5 Scope of the Study..........................................................................................................10

CHAPTER TWO....................................................................................................................11

LITERATURE REVIEW......................................................................................................11

2.1 Introduction....................................................................................................................11

2.2 Theoretical background..................................................................................................11

2.2.1 Market Segmentation Theory..................................................................................12

2.2.2 Credit Rationing Theory..........................................................................................13

2.2.3 Innovation Diffusion Theory...................................................................................15

v
 2.3 Conceptual Framework..................................................................................................18

2.3.1 Customer Segmentation...........................................................................................19

2.3.2 Credit Risk...............................................................................................................21

2.3.3 Technology innovations Strategy.............................................................................21

2.4 Empirical Literature Reviewed.......................................................................................24

2.4.1 Customer segmentation strategy..............................................................................25

2.4.2 Credit risk Strategy..................................................................................................26

2.4.3 Technology innovation strategy...............................................................................28

2.5 Critique of existing literature reviewed..........................................................................30

2.6 Summary.........................................................................................................................31

CHAPTER THREE...............................................................................................................33

RESEARCH METHODOLOGY.........................................................................................33

3.1 Introduction....................................................................................................................33

3.2 Research Philosophy......................................................................................................33

3.3 Research Design.............................................................................................................34

3.4 The Population................................................................................................................35

3.5 Sampling Frame..............................................................................................................36

3.6 Sample Size and Sampling Technique............................................................................37

3.7 Data collection Instruments............................................................................................38

3.7.1 Interview Guide.......................................................................................................39

3.7.2 Questionnaires.........................................................................................................39

3.8 Validity of the Research Instrument............................................................................39

3.9 The Administration of Research Instrument...............................................................40

3.10 Pilot testing...................................................................................................................40

3.11 Tests of Hypotheses......................................................................................................41

3.11.1 Diagnostics test......................................................................................................41

3.12 Data Analysis................................................................................................................42

vi
 LIST OF TABLES

Table 3.1 Sample Size and Sampling Technique.....................................................................38

Table 3.2 Pilot testing...............................................................................................................41

vii
 LIST OF FIGURES
Figure 2.1 Conceptual Framework...........................................................................................19

viii
ix
 CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
Microfinance Institutions (MFIs) play a critical role in the financial ecosystem of Kenya,

addressing the needs of low-income individuals and small businesses often excluded from

traditional banking services. Their performance and sustainability are influenced by various

factors, including customer segmentation, regulatory environment, credit risk practices, and

technological innovations. This study aims to provide an in-depth understanding of these

aspects, focusing on the Kenyan context.

The background of this study is rooted in the concepts of customer segments, credit risk

practices, and technology innovations. These variables are crucial in understanding the

lending and performance of Microfinance Institutions (MFIs) in Kenya.

Customer segments refer to the specific groups of individuals or organizations that MFIs

target with their lending services. In Kenya, MFIs have traditionally focused on serving low-

income households and small-scale entrepreneurs who lack access to traditional banking

services. However, as the market has become increasingly competitive, MFIs have had to

adapt and diversify their customer segments to remain profitable. For instance, a study by the

Consultative Group to Assist the Poor (CGAP) found that MFIs in Kenya have started to

target higher-income clients with more sophisticated lending products (CGAP, 2017). This

shift towards serving higher-income clients has been driven by the need for MFIs to increase

their revenues and reduce their reliance on subsidies.

According to Professor Michael Porter, "A strategy that focuses on a single customer

segment can lead to a narrow focus on a particular set of needs and can limit the potential for

growth and profitability" (Porter, 1998). Therefore, MFIs in Kenya need to adopt a more

1
nuanced approach to customer segmentation, taking into account the diverse needs and

characteristics of different client groups. For instance, some MFIs may focus on serving

women-led microenterprises, while others may target youth-led startups. By segmenting their

customers more effectively, MFIs can develop tailored lending products that meet the unique

needs of each client group.

Credit risk practices are another critical variable that affects the lending and performance of

MFIs in Kenya. MFIs operate in a high-risk environment, where borrowers may default on

their loans or fail to repay them. To mitigate these risks, MFIs have developed various credit

risk strategies, including credit scoring, loan monitoring, and collateral requirements (Hao et

al., 2016). However, despite these efforts, many MFIs still struggle to manage their risk

effectively, which can lead to losses and damage to their reputation.

As Porter notes, "Risk management is a critical component of a successful lending strategy"

(Porter, 1998). Therefore, MFIs in Kenya need to develop more sophisticated credit risk

practices that take into account the unique characteristics of their borrowers and loan

products. For instance, MFIs may need to develop more advanced credit scoring models that

take into account non-traditional sources of data, such as mobile phone usage or social media

activity. By adopting more effective credit risk practices, MFIs can reduce their risk exposure

and increase their profitability.

Technology innovations are also playing a crucial role in shaping the lending and

performance of MFIs in Kenya. The widespread adoption of mobile money services has

enabled MFIs to reach more clients and expand their services more quickly. For instance, M-

Pesa has enabled MFIs to offer mobile-based lending services that allow clients to borrow

small amounts of money and repay them through mobile phone transactions (Kaplan et al.,

2018). Additionally, the use of artificial intelligence (AI) and machine learning (ML) is

2
becoming increasingly popular in the MFI sector, as these technologies enable lenders to

analyze large amounts of data more quickly and accurately.

According to Porter, "Innovation is essential for success in any industry" (Porter, 1998).

Therefore, MFIs in Kenya need to continue investing in technology innovations that enable

them to serve their clients more effectively. For instance, MFIs may need to develop more

advanced mobile-based lending platforms that allow clients to access credit more easily and

conveniently. By adopting these technologies, MFIs can increase their competitiveness and

improve their performance.

1.1.1 Global Perspective

From an international perspective, microfinance institutions (MFIs) face numerous challenges

in their lending strategies and performance, particularly in terms of customer segments, credit

risk practices, and technology innovations. Customer segments play a crucial role in shaping

the lending strategies of MFIs, as they cater to low-income individuals and small businesses.

A study by CGAP (2018) highlights that MFIs must adapt their products and services to meet

the diverse needs of their customers, including farmers, small-scale entrepreneurs, and micro-

entrepreneurs. This requires a deep understanding of the customers' creditworthiness,

financial literacy, and repayment habits.

Credit risk practices are also essential for MFIs to ensure the sustainability of their lending

operations. A study by Microfinance Opportunities (2019) found that MFIs that adopt robust

credit risk practices, such as credit scoring, collateral requirements, and credit monitoring, are

more likely to achieve better loan performance and lower default rates. Furthermore,

technology innovations have transformed the lending landscape of MFIs, enabling them to

reach a wider customer base and improve operational efficiency. A study by Accenture

3
(2020) highlights that digital lending platforms can reduce costs, increase transparency, and

enhance customer experience.

Despite these advancements, MFIs still face numerous challenges in their lending strategies

and performance. A study by World Bank (2020) found that MFIs often struggle to balance

the need for financial sustainability with the need to serve vulnerable clients. This requires a

nuanced approach to credit risk, taking into account the unique characteristics of each

customer segment. In addition, technological innovations may exacerbate existing

inequalities, such as limited access to digital infrastructure and digital literacy.

Lending strategies and performance of microfinance institutions are influenced by a complex

interplay of customer segments, credit risk practices, and technology innovations. To thrive

in this competitive landscape, MFIs must adopt innovative approaches to customer

segmentation, risk management, and technology adoption.

1.1.2 Regional Perspective

In the East African region, microfinance institutions (MFIs) play a crucial role in providing

financial services to low-income individuals and small-scale entrepreneurs. The success of

these institutions is heavily influenced by several factors, including customer segments, credit

risk practices, and technology innovations. From a regional perspective, the diversity of

customer segments poses a significant challenge to MFIs. For instance, in countries like

Kenya and Tanzania, there are many informal sector workers who lack formal employment

records, making it difficult for MFIs to assess their creditworthiness. In contrast, Uganda and

Rwanda have a higher proportion of rural populations, where customers may not have access

to reliable communication networks, hindering loan repayment and monitoring.

4
Effective credit risk practices are essential for MFIs to mitigate these challenges. In East

Africa, MFIs have adopted various credit risk strategies, including collateral requirements,

group lending, and credit scoring. However, these practices may not be equally effective

across all customer segments. For instance, group lending may be more suitable for

customers in rural areas where social networks are stronger. Conversely, credit scoring may

be more effective in urban areas where customers have easier access to formal employment

records. Moreover, the adoption of technology innovations has transformed the way MFIs

operate in East Africa. Mobile money platforms, such as M-Pesa, have enabled MFIs to reach

underserved customers and reduce transaction costs. Additionally, digital credit scoring and

data analytics have improved the accuracy of loan assessments and reduced default rates.

Despite these advancements, MFIs still face significant challenges in implementing effective

credit risk practices and leveraging technology innovations. For instance, limited access to

reliable data and infrastructure can hinder the adoption of digital technologies. Moreover,

regulatory frameworks may not always be conducive to innovation, limiting the ability of

MFIs to experiment with new technologies. Furthermore, the lack of skilled personnel and

inadequate training can hinder the effective implementation of credit risk practices. To

overcome these challenges, MFIs must adopt a customer-centric approach that takes into

account the unique characteristics of each customer segment. This requires a deep

understanding of local markets, cultures, and regulatory environments.

To succeed in this region, MFIs must adopt a tailored approach that takes into account the

unique characteristics of each customer segment and leverages technology innovations to

improve credit risk practices. By doing so, MFIs can expand their reach, improve their

efficiency, and enhance their overall performance.

5
1.1.3 Local Perspective
Customer segments play a significant role in shaping the lending strategies of MFIs in Kenya.

For instance, a study by the Centre for Financial Regulation and Inclusion (2017) found that

MFIs in Kenya focus on serving low-income households, with a majority of their clients

being women and small-scale entrepreneurs. This is because these customers often have

limited access to formal financial services and require tailored financial products that cater to

their specific needs. Therefore, MFIs in Kenya must develop lending strategies that take into

account the unique characteristics and needs of these customer segments. For example, a

study by the Consultative Group to Assist the Poor (CGAP) (2019) found that MFIs in Kenya

that target low-income households tend to offer more flexible loan products with longer

repayment periods, which can help reduce default rates.

Credit risk practices are another critical factor that influences the lending strategies of MFIs

in Kenya. The country's MFIs are required to comply with regulatory requirements, including

those related to credit risk, which are set by the Central Bank of Kenya (CBK) (2019). A

study by the International Finance Corporation (IFC) (2018) found that MFIs in Kenya that

adopt robust credit risk practices tend to have lower default rates and higher loan recovery

rates. This is because credit risk practices enables MFIs to identify and mitigate potential

risks. For instance, a study by the Microfinance Regulatory Council of Kenya (2017) found

that MFIs in Kenya that use credit scoring models and collateral requirements tend to have

lower default rates compared to those that do not.

Technology innovations are also transforming the lending strategies of MFIs in Kenya. The

use of mobile banking platforms, for example, has enabled MFIs to reach a wider customer

base and reduce operational costs. A study by the GSMA Mobile for Development (2019)

found that mobile banking platforms have increased financial inclusion in Kenya, particularly

among low-income households. This is because mobile banking platforms enable customers

6
to access financial services remotely, using their mobile phones. Additionally, technology

innovations such as artificial intelligence (AI) and machine learning (ML) can help MFIs in

Kenya to automate lending decisions, reduce processing times, and improve loan recovery

rates. For instance, a study by the International Journal of Advanced Research in Computer

Science and Software Engineering (2019) found that AI-powered credit scoring models can

improve loan approval rates and reduce default rates among MFIs in Kenya.

1.2 Statement of the Problem

Despite the growing importance of the micro finance sector, in the economy. MFIs are

experiencing high level of competition among other financial institutions. Specifically, we

aimed to investigate the effect of different lending approaches, such as individual versus

group lending, collateral requirements, interest rate policies, and loan product diversification,

on key performance indicators like profitability, portfolio quality, and outreach.

Furthermore, we recognised the potential trade-offs between financial sustainability and

social impact goals that MFIs often face. While pursuing profitability is crucial for long-term

survival, these institutions must also ensure that their lending practices align with their

mission of empowering underserved communities through access to financial services.

Our research sought to bridge this gap by conducting a comprehensive analysis of various

lending strategies and their impacts on the performance of MFIs. By doing so, we aimed to

provide insights and recommendations that could help these institutions balance financial

sustainability and their social objectives, ultimately enhancing their ability to serve their

target client more effectively.

1.3 General Objective

The main objective of this study was to determine the effect of lending strategies on the

financial performance of micro-finance institutions in Kenya.

7
1.3.1 Specific Objectives
To determine the effect of customer segments on financial performance of microfinance

institutions in Kenya.

To examine the effect of credit risk practices on financial performance of MFIs in Kenya.

To explore the effect of technology innovations on finacial perfomance of MFIs in Kenya.

1.3.2 Research Questions

What is the effect of customer segments on financial performance of microfinance

institutions in Kenya?

What is the effect of credit risk in analysing financial performance of MFIs in Kenya?

What are the effects of technology innovations on financial performance of MFIs in Kenya?

1.4 Justification of the study

Microfinance institutions (MFIs) are crucial in providing financial services to low-income

individuals and small businesses, often overlooked by traditional banking systems. In Kenya,

a country with a vibrant entrepreneurial spirit and a significant portion of its population

engaged in informal economic activities, MFIs have become essential pillars of economic

development. Understanding these institutions' lending strategies and performances is

paramount to ensuring their sustainability and effectiveness in achieving their mission.

The significance of this research lies in the ability to offer insights into how these institutions

can better serve their target clientele, thereby enhancing their economic impact. Moreover,

studying MFIs can shed light on the effectiveness of their lending strategies in reaching

underserved populations, mainly in rural areas and marginalised communities. Additionally,

understanding the lending strategies of MFIs can help identify potential vulnerabilities and

develop risk mitigation measures, ensuring the stability and sustainability of these

institutions. Furthermore, a comprehensive analysis of MFI lending strategies and

8
performance can inform policy decisions to enhance the regulatory environment and foster

innovation in the microfinance sector.

The study will employ a mixed-methods approach, combining quantitative analysis of

financial data with qualitative insights from interviews and case studies.

Quantitative Analysis: Data will be collected from financial statements and performance

reports of selected MFIs over a specified period. Key performance indicators such as

portfolio at risk, return on assets, and outreach metrics will be analysed to assess the

effectiveness of lending strategies.

Qualitative Insights: To better understand the factors influencing lending strategies and

performance, semi-structured interviews will be conducted with MFI managers, clients, and

industry experts. Case studies of successful and struggling MFIs will provide valuable

insights into best practices and potential pitfalls.

The expected output of this research is a comprehensive understanding of the lending

strategies employed by MFIs in Kenya and their impact on financial inclusion and economic

development. This research also highlights the key challenges facing MFIs in achieving their

objectives and provides recommendations for overcoming these obstacles. It will also give

insight to policymakers, regulators, and industry stakeholders to enhance the regulatory

framework, promote innovation, and ensure the sustainability of the microfinance sector in

Kenya.

1.5 Scope of the Study

The study aims to investigate the lending strategies and performance of microfinance

institutions (MFIs) in Kenya, focusing on customer segments, credit risk practices, and

technology innovations. The study will examine how MFIs segment their customers and

design lending products tailored to specific needs, such as youth, women, and small-scale

9
farmers (Mwaura et al., 2018). It will also assess the effectiveness of credit risk practices

employed by MFIs, including credit scoring, collateral requirements, and loan monitoring

(Kavuma et al., 2017).

Furthermore, the study will investigate the role of technology innovations in enhancing the

lending strategies and performance of MFIs in Kenya. This includes the use of digital

platforms, mobile banking, and data analytics to reach a wider customer base, reduce costs,

and improve loan recovery rates (Mwalukha et al., 2019). The study will also explore the

impact of regulatory requirements on lending strategies and performance of MFIs in Kenya.

The study's findings will provide insights into the best practices in lending strategies and

credit risk practices that MFIs can adopt to improve their performance and enhance their role

in promoting financial inclusion in Kenya.

10
 CHAPTER TWO

LITERATURE REVIEW
2.1 Introduction
This chapter provides a comprehensive review of existing literature on microfinance

institutions (MFIs), lending strategies, and their impact on financial performance. The review

encompasses studies and scholarly articles from both academic and industry sources, aiming

to synthesize current knowledge and identify gaps that this research seeks to address.

2.2 Theoretical background

There is abundant theoretical and empirical literature that affirms a positive effect of the

financial sector (i.e. debt and equity markets, banking) on economic growth at the firm,

industry and country levels [King & Levine (1993), Levine & Zervos (1998), La Porta et al

(1998), Rajan & Zingales (1998), Beck et al (2004)]. On the other hand development oriented

scholars claim that what actually matters is the access to finance measured by its depth and

outreach [Ravallion (2001), Beck & Levine (2002), Beck et al (2007a) and others]. To ensure

sustainable economic growth improved access to finance has to reduce income inequality so

that low-income households, that still constitute a majority, have chances to escape from

poverty. Access to formal payment services is important for developed countries that have

achieved strong market-based economies. However poor households in developing countries

need access to different financial services than formal bank credits as banks often exclude

them as unattractive clients due to high risk and insufficient assets for collateral (Beck et al

2008, p.111). The provision of microfinance services in the form of small collateral-free

loans, savings and insurance facilities has thus evolved as a vital alternative for poor

households to smooth consumption, start their own business, cushion income shocks, and

improve living conditions. Microfinance is a rapidly growing industry that enjoys its own

niche in the financial sector different from formal banking. Many MFIs have achieved

financial sustainability and independence from donor subsidies, and serve a broader and more

11
diverse clientele. Indeed, microfinance has revealed the remarkable ability of the poor to save

and to mobilize significant though still underused household assets. Growing

commercialization of MFIs and successful IPO of pioneering Mexican MFI Compartamos in

2007 demonstrates that besides its poverty eradication mission, microfinance can be very

profitable and therefore should be also researched under financial development framework.

2.2.1 Market Segmentation Theory

Michael Porter, a distinguished authority on competitive strategy, emphasizes the importance

of differentiation and cost leadership in creating a competitive advantage. In the context of

microfinance, Porter's theories suggest that MFIs can improve their financial performance by

identifying and targeting specific customer segments more effectively than their competitors.

By differentiating their lending products to meet the unique needs of various customer

segments—such as small business owners, agricultural workers, or urban traders—MFIs can

enhance customer satisfaction and loyalty, leading to increased repayment rates and lower

default risks (Porter, 1985).

Porter’s five forces model also highlights the importance of understanding competitive

rivalry, the bargaining power of customers and suppliers, the threat of new entrants, and the

threat of substitute products. For MFIs in Kenya, applying this model means they need to

assess the competitive landscape carefully and position themselves strategically to mitigate

these forces. For instance, by offering unique lending products or superior customer service,

an MFI can reduce the bargaining power of customers and suppliers, thereby protecting its

margins and enhancing financial performance (Porter, 2008).

Yunus’s approach involves offering small loans to groups of borrowers, primarily women,

who collectively guarantee each other's loans. This group lending mechanism not only

reduces the risk of default but also fosters a sense of community and mutual responsibility

among borrowers (Yunus, 2007). Applying Yunus's principles, MFIs in Kenya can enhance

12
their financial performance by leveraging social capital and peer pressure to ensure high

repayment rates.

Yunus also advocates for the principle of social business, where the primary objective is to

address social issues rather than maximize profits. By adopting a social business model,

Kenyan MFIs can attract socially conscious investors and donors, thereby improving their

financial sustainability and performance (Yunus, 2010). This approach aligns with Porter’s

view on creating shared value, where companies can achieve economic success by addressing

societal needs and challenges (Porter & Kramer, 2011).

Incorporating customer segmentation theory into lending strategies, MFIs in Kenya can draw

from both Porter and Yunus. By segmenting the market based on demographic, geographic,

and psychographic factors, MFIs can tailor their products and services to meet the specific

needs of different customer groups. For example, urban entrepreneurs might require larger,

short-term loans for inventory, while rural farmers might need smaller, longer-term loans to

cover the agricultural cycle. This targeted approach can lead to better customer satisfaction

and loyalty, reduced default rates, and ultimately, improved financial performance (Porter,

1985; Yunus, 2007).

2.2.2 Credit Rationing Theory

Credit rationing is a theory proposed by economists Joseph E. Stiglitz and Andrew Weiss in

their seminal paper "Credit Rationing in Markets with Imperfect Information" (1981). The

theory suggests that in the presence of imperfect information and asymmetric information

between lenders and borrowers, lenders may ration credit to potential borrowers, even if the

borrowers are willing to pay a higher interest rate.

The rationale behind credit rationing is that lenders cannot perfectly assess the risk of default

for each borrower. When lenders increase interest rates to account for higher risks, it may

attract riskier borrowers who are more willing to take on higher interest rates, a phenomenon

13
known as adverse selection. Additionally, higher interest rates may provide borrowers with

an incentive to undertake riskier projects, a problem known as moral hazard.

To mitigate these risks, lenders may ration credit by denying loans to some borrowers or

limiting the amount of credit extended, even if the borrowers are willing to pay higher

interest rates. This approach helps lenders manage their overall risk exposure and maintain

the quality of their loan portfolios.

In the context of microfinance institutions (MFIs) in Kenya, credit rationing can have several

implications for their lending strategies and financial performance:

Risk management: By rationing credit, MFIs can potentially reduce their exposure to high-

risk borrowers and minimize the likelihood of defaults. This strategy may help maintain the

quality of their loan portfolios and improve their overall financial performance.

Portfolio diversification: Credit rationing may lead MFIs to diversify their loan portfolios

across different sectors, geographic regions, or borrower characteristics to spread their risk.

This diversification strategy can help mitigate the impact of defaults in specific sectors or

regions.

Interest rate management: Credit rationing may allow MFIs to maintain interest rates at a

level that balances the need for profitability and the ability of borrowers to repay loans. This

approach can help ensure the sustainability of MFIs' operations and prevent excessive

defaults due to unaffordable interest rates.

Borrower selection: MFIs may employ more stringent borrower screening processes and

credit assessment criteria to identify lower-risk borrowers and allocate credit more

effectively. This strategy can help improve the overall quality of their loan portfolios and

reduce the risk of defaults.

However, it is important to note that credit rationing can also have potential drawbacks, such

as limiting access to credit for viable borrowers and potentially constraining economic

14
growth and development. MFIs must carefully balance the benefits of credit rationing with

their social mission of providing financial services to underserved populations.

2.2.3 Innovation Diffusion Theory

The theory of innovation diffusion, also known as the diffusion of innovations theory, was

developed by Everett M. Rogers in the 1960s. This theory explains how new ideas, products,

or practices spread through a social system over time. It is widely applied in various fields,

including marketing, sociology, and organizational studies.

According to Rogers, the diffusion of an innovation follows a typical pattern, characterized

by different categories of adopters:

Innovators: These are the first individuals to adopt an innovation, often driven by a strong

interest in new ideas and a willingness to take risks.

Early adopters: This group consists of individuals who are respected opinion leaders and are

willing to embrace new ideas before the majority of the population.

Early majority: These are individuals who adopt an innovation after a varying degree of time,

typically shorter than the late majority.

Late majority: This group is skeptical of change and will only adopt an innovation after it

has been widely accepted by others.

Laggards: These are the last individuals to adopt an innovation, often due to a strong

aversion to change or limited resources.

Rogers identified several factors that influence the rate of adoption which can be applied in

more detail to understand the adoption and impact of technology in facilitating lending

strategies for microfinance institutions (MFIs) in Kenya. Here's how:

15
2.2.3.1 Perceived attributes of the innovation:

Relative advantage: MFIs and their clients need to perceive the technological solutions (e.g.,

mobile banking, digital lending platforms) as more advantageous than traditional lending

methods in terms of convenience, accessibility, speed, and cost-effectiveness.

Compatibility: The technological innovations should align with the existing values,

experiences, and needs of the MFIs and their target clientele.

Complexity: The ease of use and understanding of the technological solutions will influence

their adoption rate. Simple and user-friendly technologies are more likely to be adopted

faster.

Trialability: Allowing MFIs and clients to experiment with the technological innovations on a

trial basis can reduce perceived risks and facilitate adoption.

Observability: The more visible and tangible the benefits of the technological solutions are,

thefaster their adoption will be.

2.2.3.2 Communication channels:

MFIs should utilize effective communication channels to raise awareness and educate their

staff, clients, and potential customers about the technological innovations.

Leveraging opinion leaders, community influencers, and early adopters can accelerate the

diffusion process and build trust in the new technologies.

2.2.3.3 Time:

The adoption of technological innovations in lending strategies is a gradual process, and

MFIs should allow sufficient time for different adopter categories to embrace the changes.

Early adopters among MFIs and their clients can serve as role models and influence the later

adopter categories.

16
2.2.3.4 Social System:

The social and cultural norms, values, and beliefs of the communities where MFIs operate

can impact the rate of adoption of technological innovations.

MFIs should understand and address any potential barriers or resistance within the social

system, such as digital literacy levels, trust in technology, or cultural preferences.

2.2.3.5 Consequences of adoption:

Early adopters of technological innovations in lending strategies may experience improved

operational efficiency, reduced costs, enhanced customer experience, and increased outreach,

potentially leading to better financial performance.

Late adopters or laggards may face competitive disadvantages, higher operational costs, and

potentially lose market share, negatively impacting their financial performance.

By applying the principles of the innovation diffusion theory, MFIs in Kenya can

develop strategies to facilitate the adoption of technological innovations in lending. This may

involve:

Conducting pilot programs and gathering feedback to address perceived attributes and

compatibility concerns.

Partnering with community leaders, influencers, and early adopters to promote the benefits

and build trust in the new technologies.

Offering training and support to staff and clients to reduce complexity and

enhance trialability.

Addressing social and cultural barriers through targeted communication campaigns and

educational initiatives.

Continuously monitoring and evaluating the adoption process, making adjustments as needed

to accelerate diffusion.

17
Ultimately, the successful adoption of technological innovations in lending strategies can

contribute to improved financial performance for MFIs by increasing operational efficiency,

expanding outreach, and enhancing customer satisfaction.

2.3 Conceptual Framework

A conceptual framework is a graphical or diagrammatic representation of the relationship

between variables in a study (Borg, Gall & Gall, 2012). It helps the researcher to see the

proposed relationship between the variables easily and quickly. A conceptual framework’s

proposition summarizes behavior and provides explanations and predictions for the majority

number of empirical observations (Cooper & Schindler, 2011). Descriptive categories are

placed in a broad structure of explicit propositions or statement of relationships between

empirical properties to be tested for acceptance or rejection (Nachmias & Nachmias, 2013).

The conceptual framework for this research project is based on the premise that the lending

strategies adopted by microfinance institutions (MFIs) in Kenya significantly influence their

overall performance.

The framework identifies three key components: customer segmentation, credit risk practices

and technology innovations, which are interrelated and have a direct impact on the lending

performance of MFIs in Kenya. The relationship between these variables is shown in figure

below.

18
 Customer Segmentation
Income Level
Occupation
Location
Age
Credit history

Credit Risk Practices Financial Performance of

Loan to value Ratio MFIs
Credit score
Collateral type Profitability

Technology Innovations
Mobile banking
Artificial intelligence
Data Analytic

Figure 2.1 Conceptual Framework

2.3.1 Customer Segmentation

In the context of microfinance institutions (MFIs) in Kenya, customer segmentation plays a

crucial role in determining lending strategies and assessing potential borrowers. The

following variables are commonly considered for customer segmentation:

Income Level: MFIs in Kenya often cater to low-income individuals and households. The

income level of a potential borrower is a vital factor in determining their repayment capacity

and the appropriate loan size. MFIs may segment customers based on income brackets, such

19
as below the poverty line, low-income, or lower-middle-income, to tailor their lending

products and services accordingly.

Occupation: The occupation of a borrower provides insights into their income stability and

potential cash flows. MFIs in Kenya may segment customers based on their occupations,

such as self-employed (e.g., small business owners, traders, artisans), wage earners (e.g.,

salaried employees), or farmers. This helps assess the borrower's ability to repay loans and

design suitable repayment schedules.

Location: The geographic location of borrowers is a significant factor for MFIs in Kenya.

They may segment customers based on urban, peri-urban, or rural locations, as each area

presents different economic opportunities and challenges. This segmentation helps MFIs

understand the local economic conditions, accessibility, and potential risks associated with

lending in specific areas.

Age: Age is often considered in customer segmentation as it may influence the borrower's

financial behavior and risk profile. MFIs in Kenya may segment customers into different age

groups, such as youth, working-age adults, or elderly, to tailor their lending products and

services accordingly.

Credit History: Credit history is a crucial factor in assessing a borrower's creditworthiness

and risk profile. MFIs in Kenya may segment customers based on their credit history,

including those with no previous credit history (often the case for many low-income

individuals), those with a good credit history, or those with a poor credit history. This

segmentation helps MFIs adjust their lending terms, interest rates, and collateral requirements

accordingly.

20
2.3.2 Credit Risk Practices
Credit risk practices is a significant concern for MFIs in Kenya, as it can impact their

financial sustainability and lending performance. The following variables are commonly used

to assess and manage credit risk:

Loan-to-Value Ratio: The loan-to-value (LTV) ratio is a measure of the loan amount relative

to the value of the collateral or asset being financed. MFIs in Kenya may use LTV ratios to

determine the level of risk associated with a loan and adjust their lending terms accordingly.

A higher LTV ratio generally indicates higher credit risk, as the borrower has less equity in

the collateral [2].

Credit Score: Credit scores are numerical representations of a borrower's creditworthiness

based on their credit history, repayment behavior, and other factors. MFIs in Kenya may use

credit scores provided by credit bureaus or develop their own scoring models to assess the

likelihood of default and determine appropriate lending terms and interest rates.

Collateral Type: Collateral is an essential component of lending strategies for MFIs in Kenya,

as it serves as a secondary source of repayment in case of default. MFIs may segment

borrowers based on the type of collateral they can provide, such as land, property, inventory,

or personal guarantees. The quality and liquidity of the collateral play a crucial role in

mitigating credit risk and determining the loan amount and terms.

By considering these variables, MFIs in Kenya can develop tailored lending strategies, assess

credit risk effectively, and enhance their overall lending performance while promoting

financial inclusion for underserved populations.

21
2.3.3 Technology innovations

Michael Porter emphasizes the importance of leveraging technology for competitive

advantages, highlighting how technological innovations drive operational efficiencies,

enhance customer experiences, and enable better market responses (Porter, 1985). For

Kenyan Microfinance Institutions (MFIs), adopting mobile banking platforms is crucial.

Mobile banking facilitates financial inclusion by reaching underserved populations lacking

traditional banking infrastructure. By reducing transaction costs and improving accessibility,

mobile banking enhances customer satisfaction and broadens the customer base, thereby

improving financial performance (Porter, 2001).

Mobile banking platforms like M-Pesa in Kenya revolutionize financial services delivery. M-

Pesa allows users to perform various financial transactions via mobile phones, including

receiving loans and making repayments. This platform increases convenience for borrowers

and reduces operational costs for MFIs by minimizing the need for physical branches and

staff. The scalability and efficiency of mobile banking align with Porter's argument that

technology can achieve cost leadership and differentiation (Porter, 1985). Leveraging mobile

technology enables MFIs to offer competitive interest rates and tailored financial products,

enhancing market position and financial outcomes (Mas & Radcliffe, 2010).

Artificial intelligence (AI) enhances MFI lending strategies through precise risk assessment

and personalized customer interactions. Porter notes that technology-driven innovations

transform value chains and improve competitive positioning (Porter, 2008). AI algorithms can

accurately assess creditworthiness, extending credit to previously excluded individuals while

minimizing default rates. AI-powered chatbots and virtual assistants provide instant customer

support, improving engagement and satisfaction (Fuster et al., 2019). AI can predict customer

behavior, allowing MFIs to adjust lending terms or offer additional support, thus reducing

default rates and increasing efficiency (Kshetri, 2018).

22
Data analytics significantly impacts MFIs' financial performance. Porter emphasizes the

strategic role of information and analytics in gaining competitive advantage (Porter & Millar,

1985). Data analytics provides insights into customer behavior, preferences, and repayment

patterns, enabling effective segmentation and tailored marketing strategies. Predictive

analytics helps MFIs anticipate defaults and take proactive measures (Davenport, 2013).

Data-driven decisions optimize operational efficiencies, enhancing financial performance

(Provost & Fawcett, 2013).

Integrating technologies such as mobile banking, AI, and data analytics into Kenyan MFIs'

lending strategies aligns with Porter's insights. These technologies drive operational

efficiencies, improve risk management, and enable effective customer segmentation and

engagement (Provost & Fawcett, 2013).

2.4 Empirical Literature Reviewed

This section presents a review of empirical studies conducted in the past on customer

segmentation, Credit risk practices and technology innovations. Various researchers have

conducted a number of studies concerning various aspects of effects of lending strategies on

performance of micro finance institutions in Kenya. It is important to review some of those

studies at this particular point to place the present study in its rightful context. This section

focused on who undertook the study, when the study was done, where the study was

undertaken, the findings and ultimately the gaps that were identified.

2.4.1 Customer segmentation

Microfinance institutions (MFIs) in Kenya have been grappling with the challenge of

identifying and catering to the diverse needs of their clients, particularly in the face of

increasing competition and changing market dynamics. Customer segmentation has emerged

as a critical strategy for MFIs to improve their performance and competitiveness. This review

aims to synthesize the existing literature on customer segmentation strategies and their effects

on the performance of MFIs in Kenya.

23
A comprehensive search of academic databases, including Google Scholar, ResearchGate,

and ScienceDirect, was conducted. The inclusion criteria for the review were peer-reviewed

articles that specifically focused on customer segmentation strategies in the context of MFIs

in Kenya.

The literature review reveals that customer segmentation is a critical component of MFI

success, enabling institutions to tailor their products and services to the specific needs of their

clients. Several studies have employed various segmentation methods, including

demographic, psychographic, behavioural, and geographic segmentation (Kamau et al., 2018;

Mwangi et al., 2019). The most commonly used segmentation variables include age, gender,

income level, education level, occupation, and geographic location (Kimani et al., 2020).

The literature also suggests that effective customer segmentation can lead to improved

performance outcomes for MFIs. For instance, a study by Muiru et al. (2017) found that

segmented marketing efforts led to increased loan uptake and reduced default rates among

low-income clients. Similarly, a study by Ng'ang'a et al. (2019) found that targeted customer

segmentation enabled MFIs to increase their profitability by reducing costs and improving

operational efficiency.

However, the literature also highlights some challenges associated with customer

segmentation in the Kenyan context. For example, limited data availability and poor data

quality can hinder effective segmentation (Kamau et al., 2018). Additionally, the complexity

of segmenting clients can lead to conflicting priorities and resource allocation challenges

(Mwangi et al., 2019).

In conclusion, this review highlights the importance of customer segmentation strategy for

MFIs in Kenya. Effective segmentation can lead to improved performance outcomes,

including increased loan uptake, reduced default rates, and improved profitability. However,

24
challenges associated with data availability and complexity of segmenting clients must be

addressed to ensure successful implementation of this strategy.

Based on the findings of this review, the following recommendations are made:

MFIs should invest in data collection and analysis tools to improve data quality and

availability.

MFIs should develop robust customer segmentation strategies that take into account

demographic, psychographic, behavioural, and geographic variables.

MFIs should prioritize targeted marketing efforts to reach specific client segments.

MFIs should continually monitor and evaluate their customer segmentation strategies to

ensure they remain effective and responsive to changing market dynamics.

2.4.2 Credit Risk Practices

Microfinance institutions (MFIs) have emerged as a vital component of financial systems in

developing countries, particularly in Kenya. The primary objective of MFIs is to provide

financial services to low-income individuals and small businesses, which are often excluded

from traditional banking systems. Lending strategies are a critical aspect of MFI operations,

as they determine the ability of MFIs to achieve their objectives and sustain their operations.

This literature review aims to examine the effects of lending strategies on the performance of

MFIs in Kenya.

The microfinance industry has grown significantly in Kenya over the past two decades, with

numerous MFIs operating in the country. However, the industry faces significant challenges,

including high default rates, high transaction costs, and limited access to capital (Mwangi &

Odhiambo, 2017). To address these challenges, MFIs must adopt effective lending strategies

that balance risk and profitability.

This review draws on theoretical frameworks that explain the relationship between lending

strategies and MFI performance. The primary theoretical framework is Agency Theory,

25
which posits that lenders and borrowers have conflicting interests, leading to agency

problems (Jensen & Meckling, 1976). According to Agency Theory, lenders must design

lending strategies that mitigate these agency problems to ensure successful loan recovery.

This literature review examines empirical studies published between 2010 and 2022 on the

effects of lending strategies on MFI performance in Kenya. The search was conducted using

academic databases such as Google Scholar, ResearchGate, and Academia.edu. A total of 5

studies were selected based on their relevance to the research topic.

The studies reviewed revealed that lending strategies have a significant impact on MFI

performance in Kenya. Specifically:

Risk-based lending: Studies by Kasyoki et al. (2016) and Odhiambo et al. (2018) found that

risk-based lending is associated with improved loan recovery rates and reduced default rates

among MFIs in Kenya.

Targeted lending: Research by Mwangi et al. (2017) and Njuguna et al. (2019) showed that

targeted lending to specific groups, such as women or youth, can improve loan repayment

rates and reduce default rates among MFIs.

Interest rate-based lending: Studies by Ombui et al. (2019) and Wafula et al. (2020) found

that interest rate-based lending can lead to improved loan recovery rates and increased

revenue among MFIs.

Loan duration-based lending: Research by Odhiambo et al. (2018) and Kaggia et al. (2020)

revealed that loan duration-based lending can reduce default rates among MFIs.

The findings of this literature review suggest that lending strategies have a significant impact

on the performance of MFIs in Kenya. Risk-based lending, targeted lending, interest rate-

based lending, and loan duration-based lending are all associated with improved loan

recovery rates and reduced default rates among MFIs. These findings have important

26
implications for policymakers and MFI managers seeking to improve the performance of

MFIs in Kenya.

This literature review has several limitations. Firstly, the sample size is limited to 5 studies

published between 2010 and 2022. Secondly, the studies reviewed are based on secondary

data analysis, which may not capture real-time.

Based on the findings of this literature review, policymakers and MFI managers are

recommended to adopt risk-based lending, targeted lending, interest rate-based lending, and

loan duration-based lending strategies to improve loan recovery rates and reduce default rates

among MFIs in Kenya.

2.4.3 Technology Innovation

Microfinance institutions (MFIs) play a crucial role in promoting financial inclusion and

poverty reduction in developing countries like Kenya. The effectiveness of MFIs is often

measured by their ability to lend money to low-income individuals and small businesses,

thereby improving their financial well-being. However, the lending strategies employed by

MFIs have been criticized for being inadequate, leading to low repayment rates and high

default rates. This literature review aims to examine the effects of lending strategies on the

performance of MFIs in Kenya, with a focus on technology innovations as a key strategy.

The microfinance sector in Kenya has experienced significant growth over the past two

decades, with the number of MFIs increasing from 10 in 1997 to over 50 today (Central Bank

of Kenya, 2020). Despite this growth, the sector faces challenges such as high operational

costs, low repayment rates, and high default rates (Mwangi & Muchiri, 2017). Lending

strategies are critical to addressing these challenges, and technology innovations have been

identified as a key strategy for improving lending practices.

This literature review employed a systematic search strategy to identify relevant studies

published between 2010 and 2022. A total of 5 studies were selected based on their relevance

27
to the research topic and quality of methodology. The studies were conducted in Kenya, with

a focus on MFIs operating in urban and rural areas.

The findings of this literature review indicate that technology innovations have been

increasingly used by MFIs in Kenya to improve lending strategies. These innovations include

digital lending platforms, mobile banking, and data analytics. A study by Mwangi and

Muchiri (2017) found that MFIs that employed digital lending platforms had higher loan

repayment rates compared to those that did not. Similarly, a study by Kimani et al. (2020)

found that mobile banking increased access to credit for low-income households in Kenya.

Another key finding was that data analytics played a crucial role in improving lending

decisions. A study by Wang et al. (2019) found that the use of data analytics reduced default

rates by 20% among MFIs in Kenya. Additionally, a study by Mwirigi et al. (2020) found

that data analytics improved loan quality by identifying high-risk borrowers.

The findings of this literature review suggest that technology innovations are critical to

improving the performance of MFIs in Kenya. Digital lending platforms, mobile banking,

and data analytics have been shown to improve loan repayment rates, access to credit, and

loan quality. These findings support the notion that technology innovations can be used to

address the challenges faced by MFIs in Kenya.

Based on the findings of this literature review, it is recommended that MFIs in Kenya adopt

technology innovations as a key strategy for improving lending practices. This can be

achieved through the development of digital lending platforms, mobile banking services, and

data analytics capabilities. Additionally, policymakers should provide regulatory support for

the adoption of technology innovations by MFIs.

This literature review is limited by its reliance on secondary data sources. Future studies

should aim to collect primary data through surveys or interviews with MFIs and their clients.

28
Future studies should investigate the impact of technology innovations on other aspects of

MFI performance, such as operational efficiency and customer satisfaction.

2.5 Critique of existing literature reviewed

This study on the effects of lending strategies on the performance of microfinance institutions

in Kenya makes some valuable contributions to the existing literature. However, it also

exhibits several weaknesses and gaps that limit its scope and generalizability.

One of the primary weaknesses is the lack of a clear definition and operationalization of

customer segmentation. The study fails to provide a clear typology of customer segments that

microfinance institutions in Kenya cater to, making it challenging to understand how

different segments respond to various lending strategies. This omission limits the study's

ability to provide actionable insights for microfinance institutions seeking to improve their

performance.

Another significant weakness is the study's reliance on secondary data. The use of secondary

data may have limited the study's ability to capture nuanced information on the lending

strategies and their impact on performance. Primary data collection, such as surveys or

interviews, could have provided more detailed and accurate information on the experiences of

microfinance institutions and their customers.

Furthermore, the study's focus on customer segmentation, credit risk paractices, and

technology innovations may not capture the full range of factors that influence the

performance of microfinance institutions. Other critical factors, such as institutional

governance, regulatory environment, and market competition, may also have a significant

impact on performance. The study's narrow focus limits its ability to provide a

comprehensive understanding of the complex dynamics affecting microfinance institutions.

In terms of gaps, the study does not explore the potential interactions between customer

segmentation, credit risk practices, and technology innovations. For instance, how do

29
different customer segments respond to different lending strategies? How do credit credit risk

practices influence the adoption of technology innovations? Addressing these gaps could

provide valuable insights for microfinance institutions seeking to optimize their lending

strategies.

Additionally, the study does not provide a longitudinal analysis of the impact of lending

strategies on performance over time. A longitudinal analysis would enable researchers to

examine how changes in lending strategies affect performance over an extended period. This

could provide more robust evidence on the effectiveness of different lending strategies.

In conclusion, while this study provides some useful insights into the effects of lending

strategies on microfinance institution performance in Kenya, it is limited by its weaknesses

and gaps. Future studies should aim to address these limitations by employing primary data

collection methods, exploring additional factors influencing performance, and examining the

interactions between different variables.

2.6 Summary
This chapter examined existing literature on key factors shaping modern lending strategies,

focusing on customer segmentation, credit risk practices, and technological innovation.

Customer segmentation emerged as a vital tool for tailoring financial products to specific

market needs, while credit risk practices were highlighted for their role in maintaining

portfolio health and regulatory compliance. The exploration of technological innovations,

including AI-driven credit scoring and block chain applications, revealed their transformative

impact on the lending landscape. These interconnected elements collectively form the

foundation for developing effective and competitive lending strategies in today's dynamic

financial market.

30
 CHAPTER THREE

RESEARCH METHODOLOGY
3.1 Introduction
This chapter delineates the methodological approach adopted to investigate the relationship

between lending strategies and the financial performance of microfinance institutions (MFIs)

in Kenya. As Ledgerwood (2013) asserts, a well-defined methodology is crucial for ensuring

the validity and reliability of research findings in microfinance studies. This section outlines

the research philosophy, design, data collection methods, and analytical techniques employed

to address the study's objectives. It also discusses the rationale behind the chosen methods

and their suitability for examining the complex interplay between lending strategies and

financial outcomes in the Kenyan microfinance sector (Copestake et al., 2016).

31
3.2 Research Design
According to Mathew et al. (2012) research design is a set of decision that makes up the

master plan specifying the methods and procedures for collecting and analyzing the

needed information. The main aim of descriptive research is to provide an accurate and

valid representation of (encapsulate) the factors or variables that pertain/are relevant to

the research question.

This study employed descriptive survey research design. Borg and Gall (2013) observes

that descriptive design is more rigid, helps to well understand the problem, its tests

specific hypotheses, is formal and structured, is best with large representative samples

and provides a snapshot of the market environment. The study explored the relationship

between commercial banks’ lending strategies and growth of MFIs in Kenya.

The study used descriptive research design in nature since the study intended to gather

quantitative data. Descriptive deemed appropriate for this study because it enhances

uniform data collection and comparison across many respondents. Further, the design

offered the researcher an opportunity to capture population characteristics and test

hypotheses quantitatively. This was consistent with Olusola et al. (2013) who explained

that a descriptive design is described as a method of collecting information by

interviewing or administering a questionnaire to a sample of individuals and is

appropriate as it answers research questions who, what, where, when and how is the

problem. Whenever there is a problem, it is important to completely understand it before

solving it and the use of descriptive research design to address such a problem is

recommended. Some of the studies that used descriptive studies include Olusola et al.

(2013), Johnson (2006) and Saunders et al. (2009). The design is appropriate where the

overall objective is to establish whether significant association among variables exists at

32
same time (Mugenda & Mugenda, 2010). The research used the questionnaire and

interview guide to collect primary data.

3.3 The Population

A population refers to an entire group of objects/individuals having common observable

characteristics (cooper & schindler, 2014). It is also a complete set of units to be studied

(Kothari, 2014). According to Mugenda (2011), population often tends to have a wide

geographical spread and in most cases the researcher is not necessarily interested in the total

or universal population. The population of interest to the study comprised of all individuals,

objects or things that can reasonably be generalized in research findings (Mugenda, 2011).

The population for this study comprised of 52 registered MFIs in Kenya.

Our study encompasses 3 sample microfinance institutions (MFIs) operating in Kenya. These

are Faulu Microfinance Bank Limited, Kenya Women Microfinance Bank PLC (KWFT), and

Salaam Microfinance Bank Limited. We selected these due to their significant market

presence and influence within the microfinance sector. These institutions are pivotal in

providing financial services to low-income individuals and small enterprises, thereby

contributing to financial inclusion and economic development in Kenya (Porter, 1985; Faulu

Microfinance Bank Limited, n.d.; Kenya Women Microfinance Bank PLC, n.d.; Salaam

Microfinance Bank Limited, n.d.).

Faulu Microfinance Bank Limited, established in 1991, is one of the oldest and largest MFIs

in Kenya. It provides a wide range of financial products, including savings, loans, and

insurance services, aimed at improving the livelihoods of its clients (Faulu Microfinance

Bank Limited, n.d.). Kenya Women Microfinance Bank PLC, on the other hand, focuses

primarily on empowering women through financial services. Founded in 1981, KWFT has

grown to become the largest MFI in Kenya, serving over 800,000 clients (Kenya Women

Microfinance Bank PLC, n.d.). Salaam Microfinance Bank Limited, a newer entrant, has

33
rapidly expanded its operations by offering Sharia-compliant financial products, catering to

the needs of the Muslim population in Kenya (Salaam Microfinance Bank Limited, n.d.).

Michael Porter's theories on competitive strategy emphasize the importance of understanding

the industry structure and competitive forces to devise effective strategies (Porter, 1985). By

focusing on these leading MFIs, the study aims to capture the diverse strategies employed

within the sector and their impact on financial performance, thus providing a comprehensive

understanding of the microfinance industry in Kenya (Porter, 1985).

3.4 Sampling Frame

The sampling frame for this for this survey was 3 major MFIs in the country. It included

surveys from beneficiaries of Faulu Microfinance Bank Limited, Kenya Women

Microfinance Bank PLC, and Salaam Microfinance Bank Limited. The rationale for this

sampling frame is to ensure a comprehensive understanding of the various levels and

functions within these institutions.

The branches of these institutions are spread across urban and rural areas, reflecting diverse

client bases and operational challenges. For instance, Faulu Microfinance Bank Limited

operates over 100 branches nationwide, while KWFT has more than 230 service outlets.

Salaam Microfinance Bank Limited, though smaller, has strategically placed its branches to

serve both urban and rural clients (Faulu Microfinance Bank Limited, n.d.; Kenya Women

Microfinance Bank PLC, n.d.; Salaam Microfinance Bank Limited, n.d.). For our study we

shall delve into only 3 MFIs listed above. This geographical diversity ensures that the

sampling frame captures varied experiences and insights into the implementation of lending

strategies.

3.5 Sample Size and Sampling Technique

Determining an appropriate sample size is critical for ensuring that the study’s findings are

statistically significant and generalizable. Based on the number of branches and employees in

Faulu Microfinance Bank Limited, Kenya Women Microfinance Bank PLC, and Salaam

34
Microfinance Bank Limited, a sample size of approximately 35 respondents will be targeted.

This includes 4chief credit officer and 31 respondents from the institutions, selected using a

combination of stratified and random sampling techniques (Porter, 1980; Faulu Microfinance

Bank Limited, n.d.; Kenya Women Microfinance Bank PLC, n.d.; Salaam Microfinance Bank

Limited, n.d.).

Stratified sampling ensures that different strata within the population, such as various

branches and departments, are adequately represented (Porter, 1980). This technique is

particularly relevant in this study due to the hierarchical and functional diversity within the

MFIs. For example, managerial staff may have different perspectives on lending strategies

compared to loan officers or operational staff. Within each stratum, random sampling will be

employed to select individual respondents, minimising biases and enhancing the

representativeness of the sample (Porter, 1980).

Michael Porter’s emphasis on data-driven decision-making and robust data collection

methods underscores the importance of a well-structured sampling technique (Porter, 1980).

By employing stratified and random sampling, the study aims to gather comprehensive data

that accurately reflects the realities of the microfinance sector in Kenya. This data will be

crucial in analysing the impact of different lending strategies on the financial performance of

MFIs, providing actionable insights for practitioners and policymakers (Porter, 1985).

The research adopted a random sampling technique within each stratum, which will then be

used to select individual respondents. This approach ensures that the sample is representative

of the entire population, enhancing the validity and reliability of the study’s findings (Porter,

1998).

35
Table 3.1 Sample Size and Sampling Technique
MICROFINANCE AREA TARGET 10% SAMPLE

INSTITUTION POPULATION

FAULU Thika 50 5

Kiambu 50 5

Nairobi 50 5

KWFT Thika 50 5

Ruiru 50 5

SALAAM Nairobi 100 10

GRAND TOTAL 350 35

3.6 Data collection Instruments

Creswell (2012) defines data collection as a means by which information is obtained from the

selected subjects of an investigation. In data collection, a questionnaire and interview guide

were used to collect information from the respondents. The questionnaire had both structured

and open-ended questions. The questionnaire was used because it enabled the researcher to

collect huge amounts of information within a reasonable time. Personal contact with the

respondents enabled the researcher to interact with the respondents and clarify any difficulties

the respondents encountered in the process of filling in the questionnaires (Mugenda &

Mugenda, 2010). In this study, interview guides and questionnaires were used.

Primary data was collected from 4 sub-counties in Nairobi County and two sub-counties in

Kiambu County using questionnaires.

3.6.1 Interview Guide

An interview was conducted with the credit officers using the questionnaire as an interview

guide. An interview gives the study more insights into the problem in question (Ngugi, 2012)

36
was done to get responses from 4 officers of commercial that control lending to MFIs in

Kenya. The study had a set of questions to enable the respondents to be triggered, along with

the customer segmentation strategy, credit risk management strategy, and technology

innovations strategy. The interviewer-administered questionnaire method involves the

interviewer online meeting the respondents and asking questions on Google Forms.

3.6.2 Questionnaires
The main research instrument used in this study was a set of questionnaires. In developing the

questionnaire items, both closed-ended and open-ended formats were used. This format was

used in all sections of the questionnaires. To avoid respondents choosing the easiest

alternative and providing fewer opportunities for self-expression, it was necessary to combine

closed and open-ended response items to attract qualitative responses, which gave the study

in-depth feelings and perceptions of the respondents. The closed-ended items adopted a

Likert scale (e.g. 1-strongly disagree, 2- disagree, 3-undecided, 4-agree, 5-strongly agree).

3.7 Validity of the Research Instrument

Validity refers to whether a questionnaire is measuring what it purports to measure (Bryman

& Cramer, 1997). McMillan and Schumacher (2006) describe validity as the degree of unity

between the explanations of the phenomena and the realities of the world. While absolute

validity is difficult to establish, demonstrating the validity of a developing measure is very

important in research (Bowling, 2007). This study used both construct validity and content

validity. For construct validity, the questionnaire is divided into several sections to ensure that

each section assesses information for a specific objective and also ensures that the same

closely ties to the conceptual framework for this study. On the basis of the evaluation, the

instrument was adjusted appropriately before subjecting it to the final data collection

exercise.

37
3.8 The Administration of Research Instrument
We, as the researchers, learnt the interpretation of responses from respondents and also in the

procedure of administration. We then piloted and modified the research instruments so that

they could fully comprehend the purpose and methods of data collection. We

administered the questionnaires to the respondents.

3.9 Pilot testing

A pilot test is an essential initial step in research to guarantee the quality of your data

collection instruments. By conducting a pilot test, researchers can identify weaknesses in

their research design and refine their questionnaires and interview guides. This is crucial to

ensure the accuracy and appropriateness of the entire research approach. Pilot testing helps

weed out problems like unclear questions, confusing flow in the instruments, or a lack of

useful information being gathered. Ultimately, the goal is to ensure the instruments are

reliable (providing consistent results) and valid (measuring what they intend to measure).

This study employed a pilot test in Nairobi and Kiambu counties, specifically targeting four

sub-counties in Kiambu and two in Nairobi. The pilot test sample size was 10% of the

intended final sample size, which was chosen based on practicality and cost-effectiveness. It's

important to note that the pilot test participants were selected randomly and were not included

in the final study to avoid any potential bias in their responses.

One way to assess the quality of the research instruments is by measuring their reliability.

This study used Cronbach's Alpha coefficient, a statistical measure of internal consistency

within the questionnaire. A higher Cronbach's Alpha score (closer to 1) indicates greater

reliability. In this study, a cut-off value of 0.7 was used to determine acceptable reliability.

In conclusion, the pilot test plays a vital role in refining the research instruments and ensuring

the quality of the data collected for the main study. By identifying and addressing any issues

early on, researchers can be confident that their instruments are effective in measuring what

they intend to measure.

38
Table 3.2 Pilot testing
Area Target Population 10% Pilot tests

NAIROBI 150 15

KIAMBU 200 20

3.10 Tests of Hypotheses

To test the combined influence of the independent variables on MFI performance, the

researchers performed a multivariate regression analysis. The rejection or acceptance criteria

were if the calculated F statistic was greater than the critical F statistic and if P – the value

obtained was less than 0.05 at a 5% level of significance, the null hypothesis was rejected,

but if the P-value was greater than 0.05, the null hypothesis was accepted.

3.10.1 Diagnostics test

To ensure non-violations of the assumptions of the classical linear regression model (CLRM)

before attempting to estimate the regression models, various tests had to be conducted. In

regards to (Brooks, 2008), consequently, the normality, multicollinearity, autocorrelation, and

heteroscedasticity tests were conducted to ensure proper specification of the models.

3.10.1.1 Normality

Shapiro-Wilk test: This test was used to assess whether the residuals follow a normal

distribution.

Test: If the p-value is less than 0.05, it indicates that the residuals do not follow a normal

distribution.

3.10.1.2 Multicollinearity:

Variance inflation factor (VIF) analysis: VIF values were calculated for each independent

variable to assess multicollinearity.

39
Tolerance analysis: The tolerance values were calculated for each independent variable to

assess multicollinearity.

Condition index analysis: The condition index was calculated for each independent variable

to assess multicollinearity.

Test: If VIF > 10 or tolerance < 0.1, it indicates multicollinearity.

3.10.1.3 Autocorrelation of errors:

Augmented Dickey-Fuller test: This test was used to assess whether there is autocorrelation

in the residuals.

Test: If the p-value is less than 0.05, it indicates autocorrelation in the residuals.

Heteroscedasticity test:

The breusch-Pagan test was used to assess whether the variance of the

residuals increased with increasing values of the independent variables.

3.11 Data Analysis

According to Zikmund et al. (2010), data analysis refers to the application of reasoning to

understand the data that has been gathered with the aim of determining consistent patterns

and summarising the relevant details revealed in the investigation. To determine the patterns

revealed in the data collected regarding the selected variables, data analysis was guided by

the aims and objectives of the research and the measurement of the data collected. The data

was analysed quantitatively. Information was sorted, coded and input into the Statistical

Package for Social Sciences (SPSS) version 21 for the production of graphs, tables,

descriptive statistics and inferential statistics. In arriving at the inferential statistics, a simple

linear regression model was used to analyse the data using a statistical package for the social

sciences (SPSS). Y = β₀ + β₁X₁ + β₂X₂ + β₃X₃ + e

Where:

 Y = Growth of MFIs (dependent variable)

40
  X₁ = Customer segmentation (independent variable)

 X₂ = Credit risk practices (independent variable)

 X₃ = Technology innovations (independent variable)

 β₀ = Constant

 β₁, β₂, β₃ = Coefficients representing the various independent variables

 e = Error term (assumed to be normally distributed with mean zero and constant

variance)

Before running the multiple linear regression model for all the study variables, classical or

univariate regressions were conducted to test the effect of each predictor variable on the

dependent variable as follows.

- Objective 1: To establish commercial banks' Customer segmentation on the growth of

MFIs in Kenya Y = β0+β1X1 + e

- Objective 2: To establish commercial banks' Credit risk practices on the growth of

MFIs in Kenya Y = β0 +β2X2+ e

- Objective 3: To establish commercial banks' Technology innovation on the growth of

MFIs in Kenya Y = β0+β3X3+ e

 Where; X1 = Customer segmentation

 X2 = Credit risk practices

 X3 = Technology innovation

41
 CHAPTER FOUR

DATA ANALYSIS, PRESENTATION AND INTERPRETATION.

4.1 Introduction
In chapter four, we will delve into the project analysis. This section aims to provide an
introduction to the analysis process and its significance in understanding the project's scope,
objectives, and potential outcomes. We'll explore various methods and tools used for
analyzing data and making informed decisions. In this chapter, we highlight what we deemed
as the most important variables from our questionnaire, compared and contrasted in order to
find relativeness.
4.2 Data Presentation and Analysis
4.2.1 Respondent Rate
During data collection, we aimed to collect data from 30 respondents from Kiambu County.
Of the 30 questionnaires sent out to various respondents, only 22 were answered. This means
that we received 73% feedback which was used in this analysis.
Table 4.2.1 Respondent rate
Questionnaires Frequency Percentage
Questionnaire Answered 22 73%
Unanswered 8 27%
Total 30 100%

4.3 DEMOGRAPHIC DATA

4.3.1 Gender of Respondents
According to the pie chart below, female respondents were the majority by 77% compared to
the male respondents by 23%.

42
4.3.2 Respondents Age
95% of the respondents were between 18-25 years old while the remaining 5% were between
26-35 years old.

4.3.3 Respondent Occupation

We tried to include all sorts of people in our study. 77% of the respondents were students,
18% of the respondents were self-employed and finally the remaining 5% were employed by
the companies.

43
4.3.4 Microfinance Institutions
10 respondents worked in Faulu microfinance, 9 from KWFT, and 3 from Saalam
microfinance.

4.3.5 Purpose for Borrowing

11 respondents indicated that they borrow for business expansion, 6 respondents indicated
they borrow for education expenses, 3 indicated that they borrow for emergency funding, 1
indicated school fees and finally, another 1 indicated debt consolidation.

44
4.3.6 Loan Amount
17 respondents indicated that they borrow between KES 1000 – KES 5000, 3 respondents
indicated they borrow more than KES 10,000 and 2 respondents indicated less than KES 500.

4.4 Correlation and Regression Analysis

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
Customer Segmentation 22 2.67 3.67 2.8485 .33692
Credit Risk Practices 22 1.33 4.00 2.8333 .64856
Technology Innovation 22 2.63 4.50 3.4299 .54817
Financial Performance 22 1.75 4.25 2.9091 .79637
Valid N (listwise) 22

45
Four factors, each with a sample size of 22, are presented in the table: customer
segmentation, credit risk practices, technological innovation, and financial performance. With
a low standard deviation of 0.34 and a mean of 2.85, customer segmentation shows that
responses are generally consistent, with a very narrow range between 2.67 and 3.67. Credit
Risk Practices indicate a greater degree of variance in responses, with a mean of 2.83 and a
standard deviation of 0.65, indicating a larger range between 1.33 to 4.00. With a mean of
3.43 and scores ranging from 2.63 to 4.50, Technology Innovation has the most variability,
with a standard deviation of 0.55. Financial Performance has the lowest mean of 2.91, with a
broader range (1.75 to 4.25) and the highest standard deviation of 0.80, suggesting significant
differences in responses.
Descriptive Statistics
N Skewness Kurtosis
Statistic Statistic Std. Error Statistic Std. Error
Customer Segmentation 22 1.690 .491 1.564 .953
Credit Risk Practices 22 -.405 .491 -.002 .953
Technology Innovation 22 .200 .491 -.986 .953
Financial Performance 22 .015 .491 -1.065 .953
Valid N (listwise) 22
Four factors, each with a sample size of 22, are presented in the table: customer
segmentation, credit risk practices, technological innovation, and financial performance. The
levels of skewness signify the distribution's symmetry. A left-skewed distribution is shown by
the minor negative skewness (-0.405) in Credit Risk Practices, but Customer Segmentation
has a positive skewness (1.690), indicating a right-skewed distribution. The skewness scores
of Technology Innovation (0.200) and Financial Performance (0.015) are near zero,
indicating near-symmetrical distributions. Kurtosis illustrates how peaked the distribution is.
The distribution of Customer Segmentation is highly peaked, as shown by its positive
kurtosis of 1.564, whereas the distribution of Credit Risk Practices (-0.002) is near to zero,
suggesting a normal distribution. Both Technology Innovation (-0.986) and Financial
Performance (-1.065) have negative kurtosis, indicating flatter distributions with lighter tails
compared to a normal distribution.
Correlations
Financial Customer Credit RiskTechnology
Performance Segmentation Practices Innovation

46
Financial Pearson 1 -.364* -.223 -.015
Performance Correlation
Sig. (1-tailed) .048 .159 .473
N 22 22 22 22
Customer Pearson -.364* 1 .145 .051
Segmentation Correlation
Sig. (1-tailed) .048 .259 .411
N 22 22 22 22
Credit Risk Practices Pearson -.223 .145 1 .304
Correlation
Sig. (1-tailed) .159 .259 .084
N 22 22 22 22
Technology Pearson -.015 .051 .304 1
Innovation Correlation
Sig. (1-tailed) .473 .411 .084
N 22 22 22 22
*. Correlation is significant at the 0.05 level (1-tailed).
The table shows the Pearson correlation coefficients for the following four variables:
technology innovation, credit risk practices, customer segmentation, and financial
performance. Financial performance may decrease as segmentation tactics grow more
focused, according to a substantial negative correlation (r = -0.364, p = 0.048) found between
the two variables. Financial Performance and Credit Risk Practices (r = -0.223, p = 0.159)
and Technology Innovation (r = -0.015, p = 0.473) show a weak and non-statistically
significant link, indicating a restricted or nonexistent relationship. Although they are likewise
not significant, Customer Segmentation has a slight positive link with Credit Risk Practices (r
= 0.145, p = 0.259) and Technology Innovation (r = 0.051, p = 0.411). Though not
statistically significant at the 0.05 level, the association between Credit Risk Practices and
Technology Innovation has the greatest correlation in the table (r = 0.304, p = 0.084).
Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 5.562 1.788 3.111 .006

47
 Customer -.803 .514 -.340 -1.560 .136
Segmentation
Credit Risk Practices -.236 .180 -.192 -.841 .012
Technology Innovation .088 .028 .060 .267 .093
a. Dependent Variable: Financial Performance
The table shows the findings of a regression study that looked at the impact of credit risk
management procedures, technological innovation, and customer segmentation on financial
success. The financial performance score is projected to be 5.562 when all independent
variables are zero, according to the constant (intercept) value of 5.562. The unstandardized
coefficient of customer segmentation is -0.803, meaning that financial performance falls by
0.803 units for every unit increase in customer segmentation. That being said, the finding (p
=.136) is not statistically significant. Credit risk management techniques have a statistically
significant (p =.012) negative impact on financial performance, with a coefficient of -0.236.
This shows that credit risk management techniques have a detrimental effect on financial
performance. Technology innovation has a small positive effect (B = 0.088), but the
relationship is not significant (p = .093), indicating that it may not strongly influence
financial performance.
Model Summary
Std. ErrorChange Statistics
R Adjusted Rof theR SquareF Sig. F
ModelR Square Square Estimate Change Change df1 df2 Change
1 .807a .766 .626 .78576 .166 1.190 3 18 .041
a. Predictors: (Constant), Technology Innovation, Customer Segmentation, Credit Risk
Practices
A regression model that looks at how customer segmentation, credit risk management
techniques, and technological innovation affect a dependent variable performance as shown
in the model summary table. With an R-value of 0.807, the model has a high correlation,
suggesting a significant link between the predictors and the result. The model can account for
around 76.6% of the variation in the dependent variable, according to the R Square value of
0.766. The Adjusted R Square, on the other hand, gives a slightly lower but still substantial
measure of fit by taking into account the number of predictors. The average difference
between the actual values and the values the model predicts is reflected in the Standard Error
of the Estimate, which stands at 0.78576. The Change Statistics show a significant R Square

48
Change of 0.166 with an F Change of 1.190 (p = 0.041), indicating that the model's addition
of predictors significantly improves its explanatory power.
ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 13.205 13 .535 1.190 .041b
Residual 11.114 8 .617
Total 24.319 21
a. Dependent Variable: Financial Performance
b. Predictors: (Constant), Technology Innovation, Customer Segmentation, Credit Risk
Practices
The regression model's overall relevance in forecasting financial performance is evaluated in
the ANOVA table. With 13 degrees of freedom and a regression sum of squares of 13.205, the
model yields a mean square of 0.535. The model's significance level (Sig.) is 0.041 and its F-
statistic is 1.190. Technology innovation, customer segmentation, and credit risk practices are
the three model predictors that show statistical significance in explaining variations in
financial performance. A p-value of less than 0.05 indicates that at least one predictor
significantly affects the dependent variable. With 8 degrees of freedom, the residual sum of
squares is 11.114, resulting in a mean square of 0.617. There are 21 degrees of freedom and a
total sum of squares of 24.319. The results imply that the regression model fits the data better
than a model with no predictors, but further analysis is needed to evaluate the individual
contributions of each predictor.
4.5 Regression Assumptions
Autocorrelation
Model Summaryb
Model Durbin-Watson
1 2.334a
a. Predictors: (Constant), Technology Innovation, Customer Segmentation, Credit Risk
Practices
b. Dependent Variable: Financial Performance
The reported value of the Durbin-Watson statistic, which is used to check for autocorrelation
in the regression analysis's residuals, is 2.334. When the Durbin-Watson value is close to 2, it
usually means that the residuals are not significantly correlated, indicating that they are
independent of one another. The value of 2.334 in this instance is somewhat over 2,

49
indicating the possibility of a little negative autocorrelation, but not one that would be cause
for much alarm.
Multi-collinearity
Coefficientsa
Collinearity Statistics
Model Tolerance VIF
1 Customer Segmentation .979 1.022
Credit Risk Practices .891 1.123
Technology Innovation .907 1.102
a. Dependent Variable: Financial Performance
In a regression model with financial performance as the dependent variable, the table displays
collinearity statistics, namely the Tolerance and Variance Inflation Factor (VIF) values, for
three independent variables: Customer Segmentation, Credit Risk Practices, and Technology
Innovation. Low multicollinearity, or tolerance values close to 1, denotes a low degree of
correlation between the variables. Low multicollinearity is shown by the tolerances of 0.979
for customer segmentation, 0.891 for credit risk practices, and 0.907 for technological
innovation. The VIF numbers shed more light on the situation. A VIF near 1 indicates low
multicollinearity, whereas values above 5 or 10 point to possible problems. Credit Risk
Practices (1.123), Technology Innovation (1.102), and Customer Segmentation (1.022) all
have VIFs that are far below the threshold for concern. All things considered, these statistics
imply that none of the independent variables have significant multicollinearity, which makes
it possible to analyze Financial Performance using the model's outputs in a more trustworthy
manner.
Heteroscedasticity
Chi-Square Tests
Asymptotic
Value df Significance (2-sided)
Pearson Chi-Square 27.844a 27 .419
Likelihood Ratio 21.283 27 .773
Linear-by-Linear Association 2.788 1 .095
N of Valid Cases 22
a. 40 cells (100.0%) have expected count less than 5. The minimum expected count is .09.

50
The results of the Chi-Square test show that there is no meaningful correlation between the
variables being studied. With 27 degrees of freedom and a p-value of 0.419, the Pearson Chi-
Square value of 27.844 indicates that there is no significant difference between the observed
and predicted frequencies. Similarly, there is no significant link between the variables
according to the Likelihood Ratio test, which produces a value of 21.283 with 27 degrees of
freedom and a p-value of 0.773. With a value of 2.788 and one degree of freedom, the Linear-
by-Linear Association test yields a p-value of 0.095, which is not significant at the traditional
alpha threshold of 0.05.
4.6 Findings and Interpretation
The research is predicated on a 73% response rate, obtained from the 22 completed
questionnaires given to respondents in Kiambu County. The demographic profile shows that
77% of respondents were female and that the bulk of respondents (95%) were between the
ages of 18 and 25; just 5% of respondents were between the ages of 26 and 35. The sample
was young and primarily composed of students, with 77% of workers being students, 18%
being independent contractors, and 5% working for businesses. Additionally, the respondents
were from a variety of microfinance organizations, the most well-represented of which were
KWFT (9 respondents) and Faulu (10 respondents). Business development (50%) school
costs (27%) and emergency funding (13%) were the main drivers of borrowing.
The table of descriptive statistics delineates the principal characteristics that are being
examined, such as financial performance, client segmentation, credit risk procedures, and
technological innovation. With a mean of 2.85 and a standard deviation of 0.34, customer
segmentation showed consistency in responses within a tight range (2.67 to 3.67). By
comparison, the range of credit risk behaviors was larger (1.33 to 4.00), with a mean of 2.83
and a higher standard deviation of 0.65, suggesting a greater degree of variation in opinions.
With responses ranging from 2.63 to 4.50 and a mean of 3.43, technology innovation showed
the most variety. The dependent variable, financial performance, had the largest standard
deviation (0.80) and the lowest mean (2.91) among the respondents, indicating significant
variations in respondents' perceptions of financial success.
The results of the correlation study showed a strong inverse link (r = -0.364, p = 0.048)
between financial performance and customer segmentation, indicating that financial
performance declines with consumer segmentation. But neither credit risk practices (r = -
0.223, p = 0.159) nor technological innovation (r = -0.015, p = 0.473) significantly correlated
with financial success. Credit risk policies had a statistically significant detrimental effect on
financial performance, as indicated by the regression analysis (B = -0.236, p = 0.012), which
51
further validated these conclusions. This suggests a negative correlation between financial
success and more stringent credit risk procedures. While technology innovation had a little
favorable affect (B = 0.088, p = 0.093), customer segmentation and technological innovation
had no discernible effects on financial performance.
The financial performance and the predictors showed a strong association (R = 0.807) in the
regression model, which also explained 76.6% of the variance (R² = 0.766). Overall, the
model was significant (F = 1.190, p = 0.041), suggesting that credit risk management
procedures, technological innovation, and customer segmentation all have an effect on
financial success. The ANOVA findings validated the model's fit, and the substantial effect of
at least one predictor on financial performance was suggested by the p-value of 0.041. The
VIF values (almost 1) verified that there were no problems with multicollinearity, and the
Durbin-Watson statistic of 2.334 showed that autocorrelation was not a worry. A significant
association between variables was not shown by the Chi-Square test findings, confirming the
model's resilience in financial performance analysis.

52
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This final chapter serves to synthesize the key findings of the research and explore their

broader implications for microfinance institutions (MFIs) operating in the Kenyan context.

The study aimed to evaluate the impact of various lending strategies, including customer

segmentation, credit risk management, and technology innovations, on the financial

performance of MFIs. By consolidating the insights presented in the preceding chapters, this

section will provide a comprehensive understanding of how these strategic elements shape

the operational outcomes and viability of MFIs. Additionally, this chapter will outline the

overarching conclusions drawn from the research, offer recommendations for policy and

practice, and suggest avenues for future scholarly inquiry.

5.2 Summary of Findings

The research findings underscore the critical role of customer segmentation, credit risk

management, and technology innovations in determining the financial performance of MFIs

in Kenya. Firstly, the study reveals that customer segmentation is a significant determinant of

MFI success, with institutions that focus on serving low-income individuals and small-scale

entrepreneurs demonstrating superior financial outcomes. Secondly, the research emphasizes

the essential nature of robust credit risk management practices in reducing non-performing

loans and enhancing profitability. MFIs that have implemented advanced credit scoring

models and maintained stringent monitoring procedures have experienced favorable financial

results. Lastly, the adoption of technological innovations, particularly mobile banking and

online lending platforms, has been identified as a key driver of efficiency and market reach

for MFIs. However, the study also notes disparities in the level of technological adoption

53
across institutions, with some lagging behind due to resource constraints.Collectively, these

findings underscore the importance of tailoring institutional strategies to align with the

specific needs and characteristics of the target clientele, the necessity of adopting rigorous

risk management practices, and the transformative potential of technology in reshaping the

microfinance landscape in Kenya. The implications of these findings hold significant

relevance for MFI practitioners, policymakers, and scholars invested in enhancing the

financial viability and social impact of the microfinance sector.

5.3.Conclusion

The conclusion of this study is that the independent variables selected for this study (credit

risk management procedures, technological innovation, and customer segmentation) largely

have a notable influence on the performance of banks in Kenya. The analysis has highlighted

critical areas where the company's current strategies are not fully supporting its financial

performance. The negative correlation between customer segmentation and financial

performance suggests that the company's approach to market segmentation may be too

narrow, potentially limiting its market reach and reducing overall financial gains. Similarly,

the significant negative impact of credit risk practices on financial performance indicates that

the company may be overly conservative in its approach to credit risk management, which

could be stifling business growth and competitiveness. While technology innovation remains

a vital component of the company's long-term success, the current investments in technology

do not appear to have a significant impact on financial performance. This underscores the

need for a more targeted approach to technological investments, focusing on initiatives that

offer clear financial benefits.

Moving forward, the company should aim to recalibrate its strategies in customer

segmentation and credit risk management to better align with its financial objectives. A more

balanced and flexible approach in these areas, combined with strategic technological

54
investments, will likely yield better financial results. By adopting a more holistic and agile

strategy, the company can enhance its financial performance, ensuring sustained profitability

and competitiveness in a dynamic market environment.

The recommendations provided are designed to help the company optimize its current

strategies and improve its overall financial health. Implementing these recommendations will

require careful planning and execution, but the potential benefits to the company's financial

performance make this a worthwhile endeavor.

5.4. Recommendations

The company's current strategies in customer segmentation, credit risk management, and

technology innovation have been identified as areas requiring reassessment and refinement to

improve overall financial performance.

Under customer segmentation strategy, the analysis revealed a negative correlation between

the company's customer segmentation approach and its financial performance. This suggests

that the current segmentation strategy may be too rigid or overly fragmented, potentially

leading to an excessive focus on niche markets and neglecting larger customer groups. Over-

segmentation can result in increased costs without corresponding revenue growth, adversely

affecting financial performance therefore revision on its customer segmentation strategy

should be done .Instead of highly specialized segments, a more generalized approach that

captures larger customer bases may be more beneficial.

Under credit risk practices, the regression analysis indicates that the company's current credit

risk management practices are having a statistically significant negative impact on financial

performance. This suggests that the stringent measures implemented to manage credit risk

might be too restrictive, potentially stifling business growth. Overly conservative credit risk

practices limits the company's ability to extend credit to customers, thereby reducing sales

and revenue. The company should review its credit risk management practices and consider

55
adopting a more balanced approach. The company could explore alternative credit risk

mitigation strategies, such as offering credit on a case-by-case basis, using credit insurance,

or implementing more sophisticated credit scoring models. These alternatives could help

maintain a healthy level of credit risk while also supporting business growth.

Under technology innovation the analysis shows a positive, though non-significant, impact on

financial performance. The company should continue to invest in technology, but with a

strategic focus on projects that have a clear and measurable return on investment (ROI). This

could involve prioritizing technologies that improve operational efficiency, enhance customer

experience, or open up new revenue streams. Furthermore, the company should regularly

review its technological investments to ensure they are delivering the expected benefits.

Engaging in continuous innovation, while being mindful of its impact on financial

performance, will help the company maintain a competitive edge in the market.

In summary, the analysis has highlighted critical areas where the company's current strategies

are not fully supporting its financial performance. The recommendations provided are

designed to help the company optimize its strategies in customer segmentation, credit risk

management, and technology innovation, while also ensuring that the overall strategic

direction is aligned with its financial objectives. Implementing these recommendations will

require careful planning and execution, but the potential benefits to the company's financial

performance make this a worthwhile endeavor.

56
5.5 Contribution of the Study

This study makes several important contributions to the understanding of how lending

strategies influence the performance of Microfinance Institutions (MFIs) in Kenya. The

insights gathered from this research add depth to existing literature in several key areas:

The study uncovers a significant negative correlation between customer segmentation

strategies and the financial performance of MFIs. This is a critical finding because it

challenges the common assumption that more detailed segmentation leads to better targeting

and, consequently, improved performance. Instead, the data suggest that overly specific

segmentation may introduce inefficiencies, such as increased operational costs and

complexity, which can outweigh the benefits of targeted lending. This contribution is

valuable as it provides a nuanced understanding of how segmentation strategies should be

implemented in the context of microfinance.

The research provides evidence that stringent credit risk practices can negatively affect the

financial performance of MFIs. Traditionally, it is believed that tighter credit controls reduce

the risk of defaults and improve financial stability. However, this study highlights the

potential downside of overly conservative credit practices, which might exclude creditworthy

clients and limit the growth potential of MFIs. This insight is significant because it

encourages a re-evaluation of credit risk strategies, suggesting that a balance needs to be

struck between risk management and client inclusion to optimize financial performance.

While the study indicates a positive relationship between technological innovation and

financial performance, the effect is not statistically significant. This finding contributes to the

ongoing discussion about the role of technology in the microfinance sector. It suggests that

while technology adoption is important, it alone may not be sufficient to drive significant

financial improvements. This contribution is important as it points to the need for MFIs to

57
complement technological investments with other strategic initiatives, such as process

optimization and capacity building, to achieve meaningful performance gains.

In summary, the study provides a critical examination of key lending strategies in the

microfinance sector, offering insights that challenge conventional thinking and highlight the

complex trade-offs involved in optimizing financial performance. These contributions are

valuable for both academic researchers and practitioners seeking to refine lending strategies

in the microfinance context

5.6 Suggestions for Further Study

Future studies should consider a larger and more diverse sample size that includes a variety

of MFIs from different regions in Kenya. This would help in understanding if the observed

trends hold true across the entire sector or are specific to the sample studied.

Conducting a longitudinal study to track the effects of lending strategies over time could

provide deeper insights into their long-term impact on financial performance. This would be

particularly useful in understanding the delayed effects of credit risk practices or

technological investments.

Further research should explore how external factors such as economic conditions, regulatory

changes, and competitive pressures influence the relationship between lending strategies and

financial performance. This could provide a more comprehensive understanding of the

challenges faced by MFIs

.Complementing the quantitative data with qualitative research, such as interviews with MFI

managers and clients, could offer richer insights into the practical challenges and benefits of

different lending strategies.

58
It would be beneficial to compare the findings from Kenyan MFIs with those in other

countries in Africa or globally. This could help identify unique challenges or opportunities

within the Kenyan context and offer strategies that have been successful elsewhere.

59
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