IMPACT OF SEMI - FINANCIAL INTER MEDIATION SERVICES ON PERFORMANCE OF MICRO AND SMALL ENTERPRISES (CASE STUDY OF RUARAKA SHOPPING

CENTRE)

PAUL

CHAPTER ONE INTRODUCTION. 1.0 Background The majority of the micro businesses in Kenya operate in the informal sector (GOK, 1999) with most of them being sole proprietorships or family businesses usually employing less than five persons. They are involved in small semi-organized and sometimes unregulated activities that are mainly concentrated in urban as well as in some parts of the rural areas. The business functions are usually conducted by the owner/manager in market stalls, open-yards, and residential houses and on undeveloped open grounds. Under the Local Government Act CAP 265 of the Laws of Kenya, these businesses are required to be registered and licensed by the municipal, town or county councils of the areas where they operate from but many of them are not registered. Many of these micro business operators do not have bank accounts while those who do, find the bank accounts cumbersome to operate as they have to leave their businesses unattended in order to conduct transactions in a bank.

Business practices in Kenya have gone through many changes, the most important being the introduction of Information Communication and Technology (ICT). The mobile phones have been a key ICT product that has affected business practices. This is manifest in various areas including advertisements, marketing, emergence of new products, and new methods of payments. The methods of payment through the use of mobile phones have been the most recent development in Kenya and have revolutionalized how business is conducted among the small-scale business holders. Micro-businesses have embraced the use of mobile payment technology in their operations. They view this mode of payment as an easier form of cash delivery to their suppliers and business partners, a system which is relatively affordable, personal and can be used anywhere and at any time (Anurag, Tyagi and Raddi, 2009).

Since then the mobile payment system has become popular with both the banked and the unbanked population. Micro-business operators in Kenya have adopted the use of the mobile payments as a way of transacting their business because of the relative affordability of mobile phones and the mobile banking services they offer. Various transactions are carried out using mobile payments such as paying suppliers for goods and services, paying bills, sending money to friends and relatives, withdrawing cash and topping up airtime accounts. Currently some mobile operators offer calling cards of denomination for as low as twenty Kenya shillings which provide affordable reach to most users (CCK, 2008/09). Arunga and Kahora (2007) concluded that sole proprietors and small businesses in Kenya benefited hugely from the mobile phone revolution as they are able to make savings and gain access to more customers and new services. The micro-business operators are able to transact payments directly with their customers and suppliers through a mobile phone in the palm of their hands without necessarily going through a bank (Anuradi, Tyagi and Raddi, 2009) and without having to leave their business premises. This 184 is beneficial because all it requires is for one to have a mobile phone and basic literacy to operate the phone. Other benefits derive from the fact that the system does not rely on any physical infrastructure such as phone wires and is accessible to a large segment of the population (Elder and Rashid, 2009); and from the fast speed in transacting money transfers. These features bring considerable convenience to business operations. The mobile payment providers agents are well distributed and easily accessible to the micro-business owners for support of their services in Kenya.

Most of the major Banks in Kenya have embraced Agency Banking as a way of improving the Agency banking has enabled bank customers to access the basic banking services, for example, cash deposit, cash withdrawal and bank balance inquiry conveniently or what would be termed as within the comfort of their neighbor-hood. The convenience of access to banking services and the extended hours that the agencies work has been the most attractive features to the customer (as most agencies work between 8am up to 8pm). The rural population especially has heartily welcomed this idea since they have had to sometimes go through Vexing experiences to access banking services due to the poor road infrastructure and high costs.

1.2 Statement of the Problem Since March 2007 when the mobile money transfer system M-Pesa, was launched by Safaricom mobile operator, the mobile payment has become popular with both the banked and the unbanked population serving as a deposit account for some. The service enables subscribers to use their mobile phones to carry out transactions such as pay for goods and services, pay bills, send to and receive money from friends and family, withdraw cash for their use, top up their own airtime account or top up someone else's account and manage their own accounts With the introduction of agency banking by the CBK in 2009 the micro business operators in Kenya have embraced its use in their daily business operations. Consequently, they have been able to access banking services easily . This research seeks to identify the extent which semi financial institutions have helped in development of microenterprises.

1.3 Objective of the Study 1.3.1 Main Objective The objective of the study is to find out the impact of semi financial intermediation services on the performance of small and micro enterprises. 1.3.2 Specific Objectives i. To determine the impact of semi banking services of semi financial intermediation institutions on performance of small and micro enterprises. ii. To find out the impact of money transmission services of semi financial intermediation institutions on performance of small and micro enterprises i.e. how it eases transmission of money from clients to other institutions. iii. To find out the impact of bill payment services of semi financial intermediation institutions on performance of small and micro enterprises.

1.4 Research Questions i. ii. iii. How do the banking services of semi financial intermediation institutions affect the performance of small and micro enterprises? How do money transmission services of semi financial intermediation institutions affect the performance of small and micro enterprises? How do bill payment services of semi financial services affect small and micro enterprises?

1.6 Scope of the Study The scope of the study is Ruaraka Shopping centre where small scale business enterprises will be targeted.

1.7 Significance of Study The study not only be useful to the banks in Kenya but will also provide an understanding of the effects of semi financial intermediation services providers. This study will be useful to commercial banks in Kenya as it will outline efficiency and effectiveness of agency banking services. The study will be of value to researchers as a basis of future empirical and conceptual research, which will be helpful in refining and validating findings especially when a significant number of experiences is collected and studied.

CHAPTER TWO. 2.1 Introduction This chapter summarizes the information from other researchers who have carried out their research in the same field of study. 2.2 Semi banking services on microfinance services Business practices in Kenya have gone through many changes, the most important being the introduction of Information Communication and Technology (ICT). The mobile phones have been a key ICT product that has affected business practices. This is manifest in various areas including advertisements, marketing, emergence of new products, and new methods of payments. The methods of payment through the use of mobile phones have been the most recent development in Kenya and have revolutionalized how business is conducted among the small-scale business holders. Micro-businesses have embraced the use of mobile payment technology in their operations. They view this mode of payment as an easier form of cash delivery to their suppliers and business partners, a system which is relatively affordable, personal and can be used anywhere and at any time (Anurag, Tyagi and Raddi, 2009). There is appeal and utility of mobile

banking and mobile payment services across the country as there are probably more people with mobile handsets than with bank accounts (Porteous, 2006). 2.2.1 Transmission of money The majority of the micro businesses in Kenya operate in the informal sector (GOK, 1999) with most of them being sole proprietorships or family businesses usually employing less than five persons. They are involved in small semi-organized and sometimes unregulated activities that are mainly concentrated in urban as well as in some parts of the rural areas. The business functions are usually conducted by the owner/manager in market stalls, open-yards, and residential houses and on undeveloped open grounds. Under the Local Government Act CAP 265 of the Laws of Kenya, these businesses are required to be registered and licensed by the municipal, town or county councils of the areas where they operate from but many of them are not registered. Many of these micro business operators do not have bank accounts while those who do, find the bank accounts cumbersome to operate as they have to leave their businesses unattended in order to conduct transactions in a bank. (Anurag, Tyagi and Raddi, 2009).

In March 2007, Safaricom mobile operator launched the mobile money transfer system, the MPesa. Since then the mobile payment system has become popular with both the banked and the unbanked population. Micro-business operators in Kenya have adopted the use of the mobile payments as a way of transacting their business because of the relative affordability of mobile phones and the mobile banking services they offer. Various transactions are carried out using mobile payments such as paying suppliers for goods and services, paying bills, sending money to friends and relatives, withdrawing cash and topping up airtime accounts. Currently some mobile operators offer calling cards of denomination for as low as twenty Kenya shillings which provide affordable reach to most users (CCK, 2008/09). Arunga and Kahora (2007) concluded that sole proprietors and small businesses in Kenya benefited hugely from the mobile phone revolution as they are able to make savings and gain access to more customers and new services. The micro-business operators are able to transact payments directly with their customers and suppliers through a mobile phone in the palm of their hands without necessarily going through a bank (Anuradi, Tyagi and Raddi, 2009) and without having to leave their business premises. This

is beneficial because all it requires is for one to have a mobile phone and basic literacy to operate the phone. Other benefits derive from the fact that the system does not rely on any physical infrastructure such as phone wires and is accessible to a large segment of the population (Elder and Rashid, 2009); and from the fast speed in transacting money transfers. These features bring considerable convenience to business operations. The mobile payment providers agents are well distributed and easily accessible to the micro-business owners for support of their services in Kenya. It is also easy for the micro business operators to control their mobile phone accounts as they can access their accounts any time. Burkland And Davis, (1995) Mobile technology is relatively a new business practice in Kenya as it was introduced about ten years ago. Nonetheless it is being widely used by a large population of the micro-businesses therefore making it thrive in the midst of many banks. This research will be based on the mobile payment technology with a specific emphasis on the Global System for Mobile Communications (GSM) provider, Safaricom mobile payment, M-Pesa. The research will focus on this mobile payment provider because it was the first to be introduced in the country and has more subscribers than any other. The rate of Safaricoms M-Pesa mobile payment usage in Kenya has been steadily increasing since M-Pesa was introduced in March 2007, with five million subscribers as at 31st December, 2008 out of the Safaricom mobile subscriber base of twelve million as at the same date (Business Daily, January 12, 2009). Kenyas population is estimated at 40 million people. Several mobile payment trend studies have revealed the potential of mobile network technologies for payment purposes (Pousttchi, 2003; Taga and Karlson, 2004; Speedfacts online Research, 2001). Most of these studies were conducted in developed countries and thus may not reflect the impact on the success and growth of different business environments and in particular the micro businesses in a developing country like Kenya. There exists a need therefore, for a substantive research on the impact of mobile payments on the success and growth of micro-business operators who are among those who employ mobile payments in Kenya. So far there has been no clear insight into the role that micro payments play in the development of micro-business. mobile payment technology on micro businesses and the impact on their success and growth. The micro business operator also needs to fully understand the entrepreneurial impact of this new technology on their business so as to cope with the increasing developments in the mobile payment

services on one hand, and the challenges of the micro business operating environment, on the other hand. The choice and use of technology in micro business is dependent on how well it is likely to influence greater success and growth of the business. The factors that enhance the behavioral intention to use the mobile payment technology and the actual usage of this new technology by micro businesses are highlighted. (Anurag, Tyagi and Raddi, 2009).

Mobile phone services in Kenya have operated as a duopoly with Safaricom and Celtel taking the lead since 2000. The original intention of the KCAto liberalize telecommunications in Kenya has largely been met. Growth was tremendous: from 17,000 mobile subscribers in 1999 to 11.3 million by December 2007.In December 2007, France Telecom acquired 50% of Telkom Kenya and proceeded to launch its Orange brand in Kenya in September 2008. Now called Telkom Orange, it has rolled out and aggressively marketed its mobile services, which run on GSM (global system for mobile communication) technology. In November 2008 Econet was launched, bringing to four the total number of operators. Shows how the number of both mobile phone and land line users has grown in Kenya over five years. Arunga and Kahora ,(2007)

The growth in the mobile sector was primarily a result of the friendly regulatory environment the KCA created in 1998. However, KCA only regulates communications services; it does not address electronic commerce, mobile commerce, or mobile banking. In 2006, the Kenya ICT Policy was published to promote electronic commerce and other electronic services such as mobile banking and mobile transactions. But the country still lacked a clear framework for electronic transactions, which it needed to participate effectively in the new internet economy. It needed an appropriate and comprehensive information bill to address the specific details of electronic transactions including the critical laws for this sector. Though Kenyas government did publish the Electronic Transactions Bill of 2007 to address electronic .Commerce issues such as recognition of electronic transactions and electronic signatures, it has not enacted the Kenya Information and Communications Bill of 2007.Many interested parties including mobile operators, merchants, banks, entrepreneurs and consumers want to see the accurate and inclusive ICT enacted soon, to enhance trust in electronic transactions and more specifically, mobile transactions innovations / Mobile World Congress. Burkland And Davis, (1995) Safaricom launched M-PESA in 2007. This innovation was not Safaricoms idea. It began at Vodafone, Safaricoms parent company in the UK, which was awarded funding from the Department of International Development (DFID to help develop a mobile phone-based system to improve access to financial services for people in East Africa. Safaricom only agreed to partner on

the project. The pilot implementation began on October 11, 2005; other partners were Faulu Kenya, a leading Microfinance institution in Kenya, and the Commercial Bank of Africa, which provided the traditional banking infrastructure. Late in 2007, Celtel launched Sokotele, a competitor to M-PESA. Celtels partners in the development are Packet Stream, a public data network operator, and KRep, one of Kenyas leading micro-finance institutions. K-Rep provides the banking expertise, Packet Stream supplies the vending software, and Celtel Kenyas cellular network makes the connectivity possible. Over the last two years, several banks have also embraced mobile banking technologies, enabling customers to access their bank accounts via their mobile phones. Leading microfinance institutions in Kenya, including Jamii Bora, K-Rep and Faulu Kenya, have also introduced services based on SMS (short message service) that let their clients view their balances, request account statements, and transfer money. Arunga and Kahora (2007) Technology and innovation often catch on ahead of regulation. M-PESAs growth is a classic example.Within the first eight months after its launch in March 2007, M-PESA announced a subscription base of 900,000 users and 1,200 agents operating nationwide. Meanwhile, a total of KShs. 4 billion (approx US $57 million) had been transmitted, with an average transaction value under KShs. 5,000 (approx US$71).9In April 2008, Safaricoms CEO reported that M-PESA had well over two million active subscribers, transmitting over 100 million KShs. (approx. US$ 1,428,571) a day. This was just over a year after M-PESA was launched. Three months later, at the end of July 2008, M-PESA had 3.6 million users, and was adding 10,000 new registrations daily. In just the month of July 2008, people transferred KShs. 21 billion (approx US $300 million). In November 2008 it had 4 million users. Meanwhile, in April 2008, a Steadman Group study reported that over 80% of Kenyans were aware of M-PESA and 66% had actually used it. But these M-PESA users represented only 40% of all Safaricom subscribers. If all these factors remain relatively constant, we can anticipate that M-PESA will continue to penetrate the market for the next year or so. Still, Safaricom is not authorized to operate as a bank; the money being circulated is deposited in a physical bank account at the Commercial Bank of Africa, which supervises

the daily transactions of M-PESA. Users make their transactions using virtual information.When they want to withdraw cash, they go to an agent. Burkland And Davis, (1995) In September 2008, Safaricom signed an agreement with PesaPoint Ltd. To allow MPESA subscribers to withdraw money through PesaPoint ATMs. Registered in 2005, PesaPoint has a vision: to provide all banked Kenyans with easy access to funds in their bank accounts wherever they are in the country. So far it has installed over 110 ATMs across the country. This agreement helps overcome the problem that agents sometimes do not have enough cash to issue to M-PESA customers who want to withdraw it. This partnership was a major milestone in linking M-PESA to the formal banking system, a confirmation that more financial players are willing to collaborate to improve access to financial services. In December 2008, M-PESA signed another agreement with Western Union for international cash transactions. Vodafone, Safaricom and Western Union announced that they would partner to pilot a cross-border mobile money transfer service between the U.K. and Kenya. Ultimately M-PESA subscribers will be able to receive international remittances just like local ones. According to the World Bank, Kenyans received approximately $US 1.3 billion in international remittances in 2007; for some Kenyans, these remittances are a considerable part of their total income. These innovations will certainly improve many Kenyans lives.

2.2.2 Agency banking Kenya has in the last five years made great strides in improving access to financial services throughout the country. According to a study conducted by FinAccess in 2009, financial exclusion that is people without access to any form of financial services has fallen from 38.4 percent in 2006 to 32.7 per cent of the population. However, despite this rosy picture, a lot still needs to be done to bring in more Kenyans under financial inclusion in line with Vision 2030, the Kenya

government economic blueprint which hopes to propel Kenya into midlevel income country in the next 20 years. Lack of access to financial services is more widespread amongst lower income and rural households and small-scale enterprises. This means that the problem has impacted directly on the livelihoods of poorer people, hence negatively affecting overall economic growth in the country. One of the reasons for the low financial exclusivity among the marginalized populace is the long distance they need to travel to access financial services. Sometimes, the amount of money someone wants to withdraw from the bank is equivalent, or even less than the transportation cost, while others find the new ultra modern banking halls intimidating. Collier, (1995) In a bid to bridge the financial divide and improve the financial access among the most vulnerable sections of the society, the government thorough the Central Bank of Kenya (CBK) has come up with Agency Banking guidelines as a means of addressing financial inclusion and enable more Kenyans access banking services. This model of banking will see Kenyans and the ever burgeoning small scale sector access financial services from bank-appointed agents, away from the traditional banking halls. Under Agency Banking, commercial banks will engage third-parties as agents through which they will be able to extend a subset of banking services. An agent may take on the form of the local Savings and Credit Cooperative Organization (Sacco), estate supermarket, mobile phone outlet, chemist, petrol station and other similar outlets, bringing services closer to the point of consumption. Such outlets have a widespread presence both in urban and rural areas, drawing their clientele from the working class who represent a substantial deposit base that bank can tap into for deposit mobilization. By employing the use of agents, banks will reduce the cost of setting up expensive branch infrastructure to provide basic services like cash deposits and withdrawals. The freed up capital can instead be used to lend to spur economic growth. Collier, (1995)

2.3 Semi financial intermediation on institutions and microenterprise

SMEs are a fundamental part of the economic fabric in developing countries, and they play a crucial role in furthering growth, innovation and prosperity. Unfortunately, they are strongly restricted in accessing the capital that they require to grow and expand, with nearly half of SMEs in developing countries rating access to finance as a major constraint. They might not be able to access finance from local banks at all, or face strongly unfavourable lending conditions, even more so following the recent financial crisis. Banks in developing countries are in turn hampered by the lack of lender information and regulatory support to engage in SME lending. The overall result is absence of a well-functioning SME lending market, and SMEs are impeded in their growth, with negative consequences for innovation, economic growth and macro-economic resilience in developing countries. Collier, (1995) Targeted IFI support, such as guarantees or technical assistance, helps to build up the knowledge and expertise of intermediaries with respect to SME lending, thus helping to catalyse an independently sustainable SME lending market. In this way, International Finance Institutions (IFIs) play an important role in catalysing the SME lending market in developing countries. As with any public intervention in private markets, the benefits need to outweigh the costs, potential adverse incentives and unintended consequences. However, IFIs are often better placed to support SMEs than local governments, whose support schemes often are less cost-efficient and more susceptible to political capture. IFIs achieve their cost-efficiency by working through local intermediaries, with the additional benefit of stimulating the creation of a local lending industry. Financial and social sustainability is further enhanced by judiciously selecting and screening intermediaries, applying strict lending standards and carefully calibrating controls and incentives.

While the introduction of Agency banking is a welcome move by the Central Bank, its haphazard implementation could defeat the point of the entire exercise which is to provide a low cost platform for financial inclusion. The industry is already witnessing a free for all from the early adopters as they rush to secure agents. This has resulted in an auction where agents are now playing one bank against another and demanding higher commissions. A shared agency banking model that allows interoperability amongst banks would be a step in the right direction. This reduces the need for agents to have agreements with 46 banks and a corresponding number of bank accounts in order to get sufficient volumes through their outlets. Shared agents would also solve the problem of customers having to travel long distances to seek their own banks agents since they can use the one most convenient to their needs. The rise of mobile telephony and the global success of Mobile Money Transfer in Kenya provide the ideal platform for the rollout of Agency Banking. With 22 million subscriber handsets in the country, the banking sector need not rollout alternate expensive infrastructure. By using mobile phones to provide financial inclusion this low-cost model will also provide employment opportunities to many businesses that will be engaged as agents through transaction commissions. Agency banking, once fully operational, could prove to be the panacea for financial inclusion in Kenya, with more Kenyans benefiting from financial services and the corresponding multiplier effect within the economy. However this can only be achieved if the most efficient and effective model is deployed from the onset.

CHAPTER THREE 3.0 RESEARCH METHODOLOGY 3.1 Introduction This chapter sets out various stages and phases that will be followed in completing the study. It involves a blueprint for the collection, measurement and analysis of data. Specifically the following subsections should be included; research design, target population, sampling design, data collection instruments, and data collection procedures and data analysis. 3.2 Research Design Research design refers to the way the study is designed, that is, the method used to carry out a research. It is important to highlight the two main methods when investigating and collecting data quantitative and qualitative. This research problem can best be studied through the use of a descriptive research design. Descriptive research is the investigation in which quantitative data is collected and analyzed in order to describe the specific phenomenon in its current trends, current events and linkages between different factors at the current time. Descriptive research design has been chosen because it enables the researcher to generalize the findings to a larger population.

3.3 Target Population Target population for in statistics is the specific population about which information is desired. According to Ngechu (2004), a population is a well defined or set of people, services, elements, events, group of things or households that are being investigated. This definition ensures that population of interest is homogeneous. The population of this study will comprise of all licensed microfinance and small businesses in Ruaraka shopping centre which are approximated to be 100.

3.4 sampling procedure Sample technique and Sample Size Sampling is that part of statistical practice concerned with the selection of individual observations intended to yield some knowledge about a population of concern, especially for the purposes of statistical inference. Each observation measures one or more properties of an observable entity enumerated to distinguish objects or individuals. (Collier,1995). However, According to (Saleemi,1998) Sampling is a procedure through which some elements are selected from the population to be representatives of the whole group. From the Colliers definition, sampling design is the practices of selecting a group to yield information on behalf of the population concerned, while from the Saleemis definition its a procedure of selecting some elements to act as representatives of the target population. The basic purpose is to select a random and unbiased sample, to get the valid conclusion that should be drawn concerning the entire population. The stratified random sampling method is most appropriate in this study. The study will use a sample of 60 respondents drawn from 20 service business and 40 offering goods services . 3.5 Data Collection The researcher will use primary for this research study. Primary data will be obtained through selfadministered questionnaires with closed and open-ended questions. The questionnaires will include structured and unstructured questions and will be administered to the respondents. The closed ended questions will enable the researcher to collect quantitative data while open-ended questions will enable the researcher to collect qualitative data. 3.6 Data Analysis The collected data will be thoroughly examined and checked for completeness and comprehensibility. The data will then be summarized, coded and tabulated. Descriptive statistics such as means, standard deviation and frequency distribution will be used to analyze the data. Data will be coded and entered. Data presentation will be done by the use of pie charts, bar charts and graphs, percentages and frequency tables. This will ensure that the gathered information is clearly understood.

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