La convivencia escolar en el salón de clase

Despite the robust growth of the MFOs, they continue to experience some challenges which if addressed would improve their performance to serve a greater proportion of the unbanked population and generate profits.

On the legal front, the law on Micro Finance enacted in 2007 is considered a major step in setting up a sector legal framework (Omimo: 2005:3). Further, the establishment of Sacco Societies Regulatory Authority (SASRA) in 2009 is a step towards securing an effective management of the SACCOs. Despite the progress made towards regulation of MFOs, the majority are still unregulated mainly because they are unable to raise the capital needed (CGAP, 2005). Lack of a comprehensive regulatory environment for all MFOs negatively affects their operations and reduces their opportunity to attract capital from investors as the sector is perceived to bear higher risks. Prudential regulation is needed to protect the financial system, protect depositors, and manage the money supply. Therefore, additional sector guidelines and overall coordination are required to promote its growth (Mokaddem, 2009:8).

MFOs in the 1980s and 1990s mainly operated using grant funds from donors whose objective was to alleviate poverty through financial support of SMEs and poor households (Macharia, 2005:1). However, as from the late 1990s, donors are reluctant to provide financial support to MFOs and most of the MFOs are not prepared to

financially sustain their operations. The change of approach to supporting MFOs was a result of several studies that showed that provision of grants does not stimulate entrepreneurial activity, hampers the financial sustainability of the provider of financial services, and undermines the development of a healthy local financial infrastructure and economy (Saban, 2005:1).

Due to failure to access grants from donors, some of the MFOs are accessing funds from commercial banks at high interest rates since clients deposit are insufficient to fund the loan portfolio asset. However, only regulated MFOs are able to source funds from banks and other potential investors, so NGOs and other unregulated MFOs often face challenges in attracting funding from banks and other potential investors because they have non-corporate ownership structures and unclear legal status. Moreover, they often are poorly leveraged because they are unable to mobilise savings (Mix Market Report, 2011:10). Cooperatives sometimes find it difficult to attract equity investment given their non-corporate ownership structure and certain limits on membership, share purchases, and voting rights (CGAP, 2005:17). Additionally, where MFOs are dependent on domestic and foreign wholesale funding, they are vulnerable to foreign exchange and liquidity risks which they have little capacity to manage appropriately (IFC, Report 2010). Hence, most of the MFOs are blocked of funds for on-lending and this limits their outreach potential and ability to achieve financial operational sustainability and increase the loan size for their clients. Mokaddem (2009:8) supports the view that MFOs have inadequate funds to operate in rural areas in Africa where the poorest people live.

According to Brau and Woller (2004:6), unlike formal sector financial institutions, the large majority of MFOs are not "sustainable" where sustainability is equated in microfinance with financial self-sufficiency. Instead, most MFOs are able to operate without covering their costs. Morduch (2000) reports a rough estimate that only 1% of MFOs are currently financially self-sustainable and that no more than 5% will ever be. According to institutionalism paradigm authors, such as Morduch (2000:618), MFOs should be able to cover operating and financing costs with generated revenue. MFOs in Africa have the highest operational costs due to weak infrastructure (communications

and roads), low average population density combined with predominantly rural markets, and high labour costs (CGAP Report, 2005). Conning (1999), argues that MFOs have to charge relatively high interest rates to cover the high costs of administration.

Navajas (2000:336) indicates that MFOs that have achieved true financial self- sufficiency have tended to lend to borrowers who were either slightly above or slightly below the poverty line in their respective countries. These MFOs are able to capture economies of scale by extending larger loans to the marginally poor or non-poor. However, Milgram (2001:213) warns that MFOs that rush to self-sufficiency result in not targeting the poor. In spite of this debate, the need for MFOs to attain operational self- sufficiency is paramount since most of them do not receive subsidies. It is observed that the smaller unregulated MFOs are more affected as they have higher costs and smaller operations. They will require scaling up, transforming, or merging with other institutions to achieve levels of efficiency that can guarantee their continued operation.

MFOs are experiencing intense competition from commercial banks. Commercial banks previously shunned SMEs and poor households, and considered them economically non-viable target segments. However, some MFOs through the use of innovative approaches to mobilise savings and provide credit to these segments, are realising good profits (UNCDF, 2006:1). They have proved to commercial banks that the poor are a viable economic target group. The United Nations Development Programme (2001) indicates that 63 of the world’s top MFOs have an average return on assets of 2.5%, which compares favourably with commercial banks. With reduced government domestic borrowing and realisation that lending to lower economic groups is potentially viable, commercial banks both local and international, are competing for business from the poor and the SMEs. They are using proven methods by MFOs to reach the lower economic income groups. Some banks are even poaching staff from MFOs who are experienced in mobilising savings and lending to lower economic segments. In spite of the competition waged by commercial banks, MFOs have loyal clients and proven lending methods and practices, and are capable of competing favourably if competitive growth strategies are formulated and implemented (Omar & Nzomo, 2003). In addition,

the competition has intensified due to new entrants who are attracted by the current microfinance law regulating the sector.

Microfinance organisations provide similar products and services to their customers. The fundamental ones are savings, loans and insurance, but enterprise lending has remained the dominant product. MFOs have been criticised for lack of product diversity. They are limited to simple short-term credit instruments which do not fully meet the needs of poor households and SMEs, but savings, insurance and long-term credit products are badly required (IFC Report, 2011). Nourse (2001) has advanced an argument that there is a need for savings and insurance services for the poor, and not just credit products. Eyiah (2001:512) also indicates that MFOs should develop tailored lending services for the poor instead of rigid loan products. Hence, MFOs are challenged to increase the range of products to address the needs of the poor and SMEs.

From the above analysis, MFOs in Kenya are experiencing various challenges that will require a sector-wide approach and participation by all key stakeholders. However, some actions from individual MFOs such as development and implementation of competitive strategies to improve their performance and survival in the competitive environment are imperative.