Challenges to the Development of Microfinance Institutions

Improper Regulations:Microfinance institutions in Kenya are heavily regulated and this

greatly restricts their operations and makes them less flexible.The major impediment to
development of microfinance business in Kenya is lack of a specific legislation to effectively
guide their operations (George Omino,2005). Number of instances are experienced in
microfinance sector when comes to the support from government that in the several pertinent
issues such as to evaluate these financial institutions, facilitate for integration with development
partners so as to create working environment and contribute more towards reducing poverty and
empowering women communities. Even lack of supporting programmes (such as insurances,
incentives to work in rural and remote areas, etc.) from Government side hinders the expansion
with depth and breadth of microfinance service outreach in inaccessible parts of Nairobi.
Increasing Competition:Increasingcompetition between microfinance institutions and

other

formal

and

informal

money

lenders

has

adversely

affected

microfinance

institutions(Boumann,1995;Christen1989). The banks pose the main challenge here.Healthy

competition is necessary for smooth and sound development of microfinance services. It is also
felt that because of lack of supporting environment and less of coordination between government
agencies and micro finance banks/institutions, number of instances where duplications in the
working area and of clients have been noticed in limited areas where more institutions work with
the same clients. Efforts still seem to be made from government side as well as close
coordination between the players of this sector to avoid such unhealthy competition.
Adverse economic conditions:These are conditions like global financial crisis,depression

and inflation (Marconi and Mosley,2006).The microfinance institutions are not an exception to
any economic condition that might affect other finance institutions in Kenya.Some economic
conditions may be propelled by global crisis or the current situation in a country.
Management challenges:Efficient and trained staff is in deficient, lack of committed

staff/personnel to work in rural and remote areas, lack of institutions doing monitoring and
supervision of financial institutions and guide them for appropriate linkages and
supports.Microfinance institutions require an efficient management system for them to thrive
well

Resource constraints: The MFIsmain funding base comes from the deposits of members

and new entrants.This constrain is due to the fact that many of their clients delay in their loan
repayment and this leads to a shortage of credit funds.
Innovative and diversified products: Microfinance is just not restricted to micro credit

only. A wide range of products are included in it e.g.savings loans, insurance money transfer,
services and working capital loans. Unfortunately in most ofthe cases MFIs have restricted
themselves to just micro-credit. Expansion of the sector depends uponthe fact that range of
services should be increased and upto maximum number of clients. Low salariedpersons are that
segment of the market which is yet to be explored, with different types of financialservices.
High Transaction Cost: Another big challenge ahead this sector is high transaction cost.

The volume of transactions is verysmall, whereas the fixed cost of those transactions is very
high. It cannot vary with the size of the loan.The higher a producers fixed costs in the proportion
of his total cost, the element of risk increases inthe same proportion. Moreover, if the demand for
the product falls or the marginal costs increases, itbecomes very difficult to adjust the cost by
cutting output. This cut will reduce revenue out of whichhe has to pay principal amount as well
as interest on the loan. This needs to be rationalized.