Participation In Microfinance And Its Effects On Household Welfare And Performance Of Micro And Small Enterprises In Kenya

ABSTRACT

The development of microfinance in Kenya is seen as a catalyst for promoting household welfare and performance of micro and small enterprises (MSEs). Through various policy frameworks, the sub-sector has recorded considerable increases in; microfinance gross lending, usage of informal microfinance and the number of licensed microfinance banks. Despite these developments, households continue to face low levels of welfare while MSEs continue to suffer from high levels of financial exclusion and shortage of operating funds. This contrasting scenarios raise policy questions on whether participation in microfinance has effects on household welfare and performance of MSEs. Past studies on Kenya demonstrated that participation in microfinance had positives effects on household welfare and MSE performance. However, such studies did not account for the distributional effects of participation in microfinance and also, the studies only focussed on a small area. In addition, there is need to account for microfinance developments that have taken place in the last decade. In light of this, the purpose of the study was to determine the effect of participation in microfinance on household welfare and performance of MSEs in Kenya. To address various objectives, the study used the 2016 FINACCESS dataset. Analysis of the determinants of household participation in microfinance was done using a heteroskedastic probit while the effect of household participation in microfinance on household welfare was estimated using the endogenous switching regression model. The determinants of MSE participation in microfinance was assessed using the probit model while the effect of MSE participation in microfinance on MSE performance was estimated using propensity score matching model. From the results, the key determinants of household participation in microfinance were; residence, age, household size, vulnerability level, financial literacy and gender. In the case of MSEs, the key determinants of participation included, age, financial literacy level, numeracy level, possession of business permit, age of firm and number of employees. On welfare, the results showed households increased their annual per capita expenditure by Kshs 28,713 when they participated in microfinance. In addition, welfare levels were higher among female-headed households than male-headed households. Also, the welfare effects generally increased with increase in wealth quintiles. On MSE participation, annual firm income increased by Kshs 36.660 when a firm participated in microfinance. Further analysis revealed that, participation in microfinance had an impact on male-owned firms only, firms aged 2 years and below and firms whose owners were above 34 years. From the results, it’s recommended that the government should enact policies that would increase participation in microfinance by both households and firms. This may be through scaling up financial literacy programmes, extending microfinance outreach to the rural areas and women.. To increase MSE performance, the government should encourage acquisition of permits and licences. Finally, policy should address obstacles that hinder youth and women-owned firms from benefiting from microfinance.