CHAPTER ONE

Introduction
This chapter will present the background of the study, statement of the problem, objectives of the
study, research questions, significance of the study, scope and limitation, conceptual framework and
operational definition of terms.

1.1 Background of the study

Financial institutions like commercial bankers, saving and Credit Co-operatives (SACCOs) and
microfinance institutions (MFIs) among others are normally engaged in both short and long term
credit lending in addition to accepting deposits among other financial services like money transfers
and issuance of performance bond.
Commercial Banks like Kenya commercial Bank, Barclays, National Bank among others are known to
carry out their lending activities through individual s, and registered legal entities upon fulfilling the
banks set terms and conditions, which to a large extend include provision of tangible collateral as a
form of security to the loan(s) advanced. It is however worth to note that some commercial banks
like K-rep, Equity, Co operative and Family bank are known to be also using group lending method,
which does not exclusively require tangible collateral, but utilizes the co guarantee mechanism as
part of the security for the loan.
SACCOs on the other hand, normally provide loans to their members, who in most cases have a
common bond (that is one employer or carry out common commercial activity like farming) It is
worth to note that, SACCOs lending are normally based on individual share contributions and
voluntary guarantee by other contributing members of the SACCO. Additionally SACCOs in the

recent past SACCOs have gone into lending using group based methodology, which in the past was
exclusively considered as a preserve of NGO based microfinance institutions.
Group based lending methodology as is commonly referred is associated with Grameen Bank of
Bangladesh, which was pioneered by Nobel Laureate Professor Muhammad Yunus and many
microfinance institutions in Africa such CITI savings of Ghana, Get A head fountain of south Africa
and Kenya women finance Trust (KWFT) in Kenya among others are employing it in a modified form
(Mutua et al 1996).
The aim of group based leading methodology was to alleviate poverty, by use of co-guarantee
mechanism members are able to access credit for economic development and was seen as one of
the most appropriate approach of accessing credit to the low income which would otherwise not
have gotten under the conventional lending terms and conditions of the conventional banks.
In sotik District there are community based financial institutions which have been formed and
adopted group based lending approach, however in the recent past they seems to have experienced
a number of challenges like default and disintegration of groups. The research would want to find
out and document these challenges being experienced by the community based institutions, so that
the new institutions that will be formed get realistic expectations while the current practitioners
uses the finding s to correct their challenging situation.

1.2 Statement of the problem

Group based lending approach has been identified as one of the innovative ways of lending to small
and micro entrepreneurs who would otherwise not get any financing from the conventional banks
as their terms and conditions are difficult to be met by these category of entrepreneurs.

As a result of this innovation, many microfinance institutions were set up with a premise of availing
loans without tangible collateral and minimal default .Despite this premise, high rate of default has
been experienced, threatening the success of microfinance institutions and the very noble objective
of group lending of being to use the model to finance small and micro entrepreneurs which had
been excluded from the main stream banking. it is for this reason that the research would want to
find out the determinants of group based lending in Sotik district, and make recommendations for
possible solutions.

1.3.0 Objectives of the study

1.3.1 General objective
The general objective of the study will be to establish the factors influencing group based lending in
Sotik district.

1.3.2 Specific Objectives

The specific objectives of the study are:
(i)To determine the drivers of group based lending methodology in Sotik district.
(ii)To rank the determinants of group based lending methodology in orders of significance in
Sotik district.

1.4 Research questions

The research questions of the study are:
(I) what are the drivers of group based lending methodology in Sotik district?

(ii) How are the determinants of group based lending methodology ranked in order of the most
influencing factor to the least in Sotik district?

1.5 Significance of the study

Kamal (1997), states that micro credit programmed has been accepted by many development
organizations as a reliable tool for poverty alleviation and rural development.
In view of this highly accepted role that microfinance play in the economic growth, It is expected

that the results of study will be useful to policy makers in policy formulation and decision
making in respect to community based, private, National and county governments
microcredit institutions, help departments of institutions implementing microcredit in
understanding the insight of group based lending, contribute to existing body of knowledge
and forms a basis for scholars in carrying out further research and the study will determine
the factors influencing group lending in Sotik district.

1.6 Scope and Limitations of the study

The study will cover three group based microfinance institutions, namely Gelegele SACCO,
Uswet Financial Services Association (FSA) and Kotabgor Women SACCO of Sotik district.
Additionally the study will focus on groups which have access loans in the three
microfinance institutions. Due to the limitation of time and money, the study will only be
carried out within Sotik District of Bomet County.

1.7 Conceptual Framework

The study focus on the factors that influences group lending , and the research
has used conceptual framework to correlate independent and dependent
variables as shown below.
Factors influencing Group based Lending (independent Variable)

Organizational factors
organizational policies &
procedures
terms and conditions
staff skills
loan structure
interest rates

Dependent Variable

group characteristics
group formation

GROUP BASE
LENDING IN SOTIK
DISTRICT

group structure
d

Intervening variables

composition
group cohesion

individual Characteristics
gender
age
level of education
adherence to group
rules

government
policy

Economic
environment

Successful group lending Model (SLM) is a function of: organizational policies (O), management
and staff abilities in managing groups (MS), group characteristic (GC) (group structure,
cohesiveness and compatibility or composition) and individual characteristics(IC)
The researcher has expressed the above conceptual framework in the function below:
SLM= f (O, MS, GC, IC--------------------------n)

1.8 operational definitions of terms

This section defines concepts as will be used in the research.
Group lending
This is a credit lending approach, which individuals in a group or group members access loans
while a member of a group.
Organizational policies and procedures
This will relate to credit policies and procedures that the group and individuals in a group must
fulfill before accessing loans.
Organizations Management and staff abilities
For the purpose of this study, this will refer to the ability of the management and the staff to

deliver on group lending.

Group Characteristics
For the purpose of this study group characteristics will involve, group formation, group
structure, composition of the group and group cohesion.

Individual Characteristics
Individual characteristics in this study will involve gender, age, level of education and
adherence to group rules and regulations.

CHAPTER TWO
Literature Review
This chapter will review literature related to the factors influencing group lending. Specifically it
presents theoretical, empirical literature and research gap.

2.0 Theoretical Literature

2.1.0 Organizational group lending policies and procedures.
According to the study on co operatives, by United Nations centre for Human Settlement
(1989) , it was found out that the structure of an organization should conform to the tasks
that it is required to perform and to the philosophy of the organization . It went further to
confirm that , a co-operative must evolve on a structure that suits their needs, for example
small group of 10 -25 members coming together simply to buy land may have a simple
structure, where regular meetings make all decisions , on the other hand a larger group with
more complex goals involving, for example mutual self help construction and joint
ownership will find it requires a corresponding more complex structure with tasks allocated
to various committees, The paper went further to state that, management style is a critical
aspect of success at primary level, the committee Members who are the management at
that level have to be listeners and remember that they are serving the members and
they must also be efficient in getting the job done.
On a paper presented by Latifee, (2008), states that, Grameen Bank provides loan without any
collateral; it is a trust based bank. It does not require any credit history or business experience
8

for providing loans. The paper went further to comment that, in Grameen system, the bank
goes to the poor. Its credit delivery recovery mechanism is very client friendly and flexible.
Repayment is made in weekly installments .it promotes social capital. The entire Grameen
system is built on peer support with the framework of a five- member group and a broader
framework of a centre. It develops leadership quality among its members through annual
election of group and centre leaders.

2.1.1 Organizations Management and staff abilities

Vepa (1984) states that, Too many wrong people jump into the small scale business
arena without much thought and found is not all smooth sailing , they know nothing
about the product , nothing about management and nothing about selling, One cannot
hope to succeed if one does not have what it takes to do well. Running a small unit is
not their cup of tea and the sooner they give up the better it is for them and for the
Country . The writer went further to comment that, failure to keep up with the times
makes many successful companies to decline. The techniques that were once successful
when the company was small do not help as the business grows. One needs to adopt
oneself to the changing needs of the times and revise styles of management.
Vepa (1984) , advices the businessmen to keep a good and close relation with labour force
since their good will and co-operation is essential for the success of a small business
,However the writer noted that, some businessmen who made a success at times tend to
underestimate the hard work and labour of their workers, which brought them success .
They imagine it is all due to their own efforts, which is partly true.
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Storey (1983) noted on the international survey on small firms that, the most commonly
Stated major problems confronting small farms is knowledge of and access to financial and
technical assistance. Further, informal sector problem are similar in kind but different in degree
to those facing the formal sector. Their major limitation is the lack of managerial knowledge
illustrated by the fact that they operated with highly restricted time-horizon so that medium
and long term planning is virtually non existence. This limit impedes the possible
transformation of informal sector out entrepreneurs into a boy of modern formal operations.
In the same study, Storey further stated that, staffing problems emerge in many firms and one
obvious area is the lack of qualified project officers capable of preparing or assisting
entrepreneurs to prepare feasible proposals, officials able to appraise proposals are also
scarce. The writer further went to state that, other deficiencies include loan officers who are
able to assess a proposal on its developmental potential rather than approve a loan based on
collateral security, consequently the abnormally large number of delinquent accounts in the
small enterprise sector, where in some cases, 100% are due to a mix of causes, which include:
lack of adequate supervisions, providing loan for reasons other than the proposal under
allegedly consideration, the absence of appropriate extension services and poor management
. Additionally, the study found out other minor problems to include high borrowing rates, short
repayment periods and no funds at all.
Storey( 1984) , further elaborated that experience and qualified personnel are in such short
supply available talents that is often concentrated on such designated priority areas as

10

government and political matters, which is at the expense of the industrial and economic
sectors.
Storey (1984) ,further stated that, policies in the informal sector are often unclear, fragmented
or absent. Where policies do not exist entrepreneurs may be unaware of them or do not know
how to make best use of them.
According to Hatch (1997), Organisation conflict is an overt struggle between two or more
groups in an organisation or between two or more organizations. Further it is unusually centred
on some state or condition that favours one social sector over others. Scarce resources or
limited opportunities can generate overt struggle within or between groups and organisations.
Conflict is also frequently explained in terms of interference and it occurs when the activities of
one social actor are perceived as interfering with the outcomes or efforts of other social actors.
The writer went further to comment that, not all people get along with each other and there
are many reasons for interpersonal conflict including personality differences, such as with
respect to authoritarianism and sociability differences in self esteem or socioeconomic
background.
According to Microfinance Insight Magazine (Vol.9, Nov/Dec.2008), on article microfinance in
Africa, Harnessing the potential of a continent, it states that among the challenges of
expanding the microfinance in Africa are: high cost of delivering services with poor
infrastructure, regulatory and policy issues, and the need to develop institutional leadership .it
went further to state that, African MFIs struggle with the primary conditions for success that of
sound leadership , MFIs and leaders need both the vision and managerial capacity to find a
11

business model , that can create efficiencies in the particular context, plan for its execution
,know the risks, chart a path that overcomes the major challenges and stay the course . The
article went further to comment that the basic need for good leadership is the issue of
information and transparency, which in microfinance has emerged as a critical element in the
successful growth of MFIs and one constraint that has been noted to developing institutional
leadership is scarcity of skilled manpower at the loan officer, middle management and at
leadership level.
Dessler,( 2008),states that, the most effective way to increase process gains is to increase each
members motivation. Although motivation is often considered the responsibility of a manager, it is
possible for the self-managed work team to motivate itself. A study at the Minnesota Department of
Natural Resources found that two-thirds of respondents felt that recognition was an important part of
their job satisfaction. Although the new project team may not have the financial resources to reward
employee performance, it definitely has the ability to recognize each member for their contributions .

2.1.2 Group characteristics

Shaw (1981), presented a theory advocated by Benoit Sullivan in 1944, and observed that a
person in a given society can be ranked on a variety, dimensions such, as age education,
income, occupational prestige and power, and suggested that such rankings tend towards
equilibrium that is a person strives to achieve a balance such that status or ranking on various
dimensions are approximately equal.
The theory goes further to explain that group performance is assumed to be the consequences
of a complex set of variables or group elements and the interactions of these elements, where
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the group elements may either be intrinsic or extrinsic. Extrinsic elements include such things
as member characteristics for example ,abilities personality characteristic, attitude, group tasks,
while intrinsic elements include those aspects of the group that result from group interaction ,
for example group structure, cohesiveness and group compatibility.
Based on this theory, a group based lending will be at equilibrium where all groups accessing
loans and savings with the institution are performing, where default, drop out of members,
stability in leadership and investment levels in a groups is within the tolerance level. However
due to intrinsic factors, the group are faced with a number of challenges among them are, poor
leadership in both the group and organization lend default or loans, drop outs of members, low
investment levels, and finally group disintegration.
Omendo (2008) defines group cohesion as the extent to which group members are attracted to
the group and motivated to remain in it. The write went to enumerate the dynamics that any
group must undergo before it can attain cohesion: First is Forming, which according to
Omendo (2008) is the period of orientation, where group members get acclimatize with each
other, and the team gets acquitted with its leadership, second, is storming which is
characterised by a level where individual personalities emerge, people become more assertive
in clarifying their perceptions of roles that benefit them, and what they expect out of the group,
and is also a stage typically marked by conflict and disagreement , which may result into fallout
and sometimes emerge an alternative leadership. The third dynamic, towards group cohesion is
Norming. Which the writer, characterised as the period after conflict have been resolved and
group harmony and unity emerge, differences are patched and members develop a sense of

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group cohesion. The fourth stage is performing, which is characterised by a mature way of
solving problems and accomplishing assigned tasks; members confront and resolve problems in
the interest of accomplishing tasks. The writer gave the last stage as Adjourning, which is
characterised by disbandment of committee task force or team whose mandate to perform
defined task has expired and change of leadership is in this stage.
Omendo,(2008), elaborated that, individuals in a group are not always the same, therefore the
process of group will not always be homogeneous, individuals grow through the phase or at
different rates and thus is normal for conflict to occur at performing stage, when everyone is
expected to contributed without suspicion or pressure.
The writer goes further explain that the cohesiveness of a group is determined by external as
well as internal, where internal factors comprises; group interaction, shared goals and personal
interaction to the group. On the other hand external factors will include: group success and
external opinions that favors the groups cohesion. It is worth to note that, the writer single out
Norming as one single factor which greatly influence the stability of the group and a group
leader therefore should be a master at guiding the group through growth process and are
mandated to ensure the adoption of desirable norms upon which group cohesiveness can be
founded.
Jain, (1997) argues that, most successful; credit programmes have developed elaborate
mechanism and process for the development of local organizations of their members. It
typically involves careful selection of members from socio economic category, training and
concretization,
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The writer further states that, credit programmes keep considerable gap between the starting
of a local group or organization and issuance of the first loan to those members. This is to
ensure that members learn to behave as a group and follows norms before considered eligible
for a loan. This innovative ways help those who do not have conventional securities like land
and shares to access loan facilities as well as saving in microfinance institutions that uses this
approach.
Jain (1997), goes further to elaborate major sources of problems in group based credit
programme and states that, an institution organizes borrowers in local groups of 15-25
members that are required to meet the deposit and loan repayment installments. Each group
elects a chairperson vice chairperson and secretary. The institution makes little or no
investment in the development of these groups. The elected leaders are not given any training
about group function. During this initial phase, no direct effort is made to solve, develop group
capacity other than enabling members to sign their names. In effect groups appear not very
different from a list of 25 odd individual borrowers who are asked to come to meet the
institution functionaries on the same day and time.
Aronson (1991), states that the makeup of the group play an important role in exerting the
pressure and group in more effective and inducing conformity if: it consist of experts, the
members (individually or collectively) are important to the individuals or the members.
(Individually or collectively) are comparable to the individual in some way.
Kamal, (1997), put it that, the assets less people have easy access to credit as it collateral free
and in spite of these, loanees are found to make defaults and sometimes the problem becomes
15

dangerous and goes out of control of the concerned organization. Consequently it becomes
impossible for the organization to achieve its development objective and institutional
sustainability
The writer goes further, to state that, due to lack of obedience the group members become
indifferent to the group and the organization, so they do not want to participate in the group
meeting, attraction for the group decreases, lesson of development education cannot be
disseminated to them, due to ignorance, the group members do not become aware of the
importance of obeying the rules of the group. Differences of opinion arises which creates
confusion in the group and develops a state of mismanagement. cooperation among the group
at the time of need decreases, utility of working in the group fruitless even the group leaders
remained unconcerned about whether the loanees are utilizing the loans in income generating
activities or not. Group unity breaks down and group pressure ceases to work, consequently the
practice of not obeying the rules of the group influences creation of defaults.
Fowler and Kinyanjui, (2004), state that, group methodologies are very dynamic. The operations
of groups keep on changing to allow more members and other instances allowing the clients to
take bigger loans. in some cases, members do graduate from the group methodology to
become individuals loanees. As a consequence, some microfinance institutions have developed
products to cater specifically for individual borrowers. As clients mature with the scheme, their
needs are for varied financial services increase, and at times they may start to question the
validity of the system. For instance, some clients may not be in favor of the group lending

16

methodology or being in large groups, while some potential clients may view the loans as very
small.
According to Kamal (1997), microcredit programme has been accepted by development organizations as
a reliable tool for poverty alleviation and rural development. The writer went further to state that the
Non Governmental organizations (NGOS) are playing a pioneering role in this sector and inspired by the
success achieved by the Grameen Bank, ASA of Bangladesh, and BRAG, the Governments and other
Banks like Rakyat Indonesia (BR) the Banco solidario (Banco sol) in Bolivia, south America, ACCION
International and SEWA in India have become keenly interested in the field of micro credit operation.
This wide acceptance of microfinance is quite encouraging and Fowler and Kinyanjui (2004) gave the
number of microfinance institution all over the world to be over 10,000 with Bangladesh having the
highest concentration.

It is worth to note that the United Nations millennium campaign and international Network for
Alternative Financial Institutions (INAFI) agreed to launch a joint global campaign towards
achieving the MDGS by mainstreaming the MDGS into the microfinance agenda at all levels..
According to vision 2030, financial services is to have a vibrant and globally competitive
financial sector driving high levels of savings and financing Kenyas investment s needs .It went
further to elaborate that the county will decrease share of population without access to finance
from 85% to below 70% at present. Further, Kenya will also streamline informal finance and
savings and credit co-operative organizations as well as microfinance institutions
The poverty reduction strategy (PRSP) 2001-2004 (2001sept) puts it that, the magnitude of the
poverty problem in Kenya is enormous with more than a half of the population living below the

17

poverty line and lack of financial services and access to commercial lending for small business
and small holder farmer was identified as a major constraint to growth and productivity. It
further went to describe that high interest rates charged by commercial lenders have made
borrowing money very expensive and the situation has trapped most Kenyans in the various
cycle of poverty and unless financial services and loans become more accessible and more
affordable, the majority of small Kenya entrepreneurs will not be able to invest in order to
generate income and create a solid savings base for further investment.
The paper further want to highlight that, there is an urgent need to explore appropriate ways of
designing financial systems and services that can support Kenyans effort to reduce poverty/
and identified three major concerns that have existed for long time and need an immediate
attention: poor access to and high cost of credit, lack of good mechanism to facilitate access to
credit and finally poor collaboration between government and providers who are mostly in
private sector.
In support of these concerns Craig(1991) in his study found out that commercial bank in Kenya
despite their county wide outreach, capacity and well developed network are still hesitant to
lend to the informal sector due to the costs and risks involved.
In respond to this exclusion of informal sector, by the tradition banks a number of microfinance
started to emerge. According to Fowler and Kinyanjui, the rise of microfinance movement was
in essence part of a search for a methodology to deal with persistent poverty, empowerment of
women and promotes participation of ordinary people in the national socio- economic
development. They went further to elaborate that group lending methodology in Asia was first
18

tried in 1976 by Yunus Mohammed as an experiment project, but later turned to what to is now
called Grameen bank. The writer want further to explain that microfinance institutions have
become major players in search for appropriate methodologies in microfinance provisions and
are atheistic promoters of research, adoption of innovations and experimentations. They
have also been known to be in the forefront of promoting Policies and practices that are
aimed at enabling microfinance to emerge and thrive.
Sessional paper No 2 of 1993 highlighted the problem of lending to small enterprises to be
occurring in three levels: first at the level of small borrower who lacks credit institutions,
secondly at the level of institutions which are not predisposed to lending to small enterprises
and third at the level of existing regulations which limit the total funds available for on lending
Mutua et al (1996) stated that, group based lending occurs through key major activities namely:
Identifying where clients are, recruiting and placing staff on site, outreach and promotion of
programme, clients recruitment and group formation, savings mobilization prior to lending
appraisal and disbursement of loans, supervision of loan repayment, collection of bad loans and
restoration of collapsing groups.
They went further to explain that potential clients are initially skeptical, many express
preference for individual loans, while some misunderstand the objectives of the programme,
associating the source of funds with government or church. In a few of extreme cases, there
has been speculation that funds are being used to hire clients into some mysterious devil
worship cult. In places where the public had experience with this situation, the respond is
cautious and even hostile. Among staff anxiety and factors of being unable to penetrate the
19

community with this new approach can be high if the implementing organization is unaware of
this, productivity can be low and staff turnover can be high and where has been attained, staff
member are tempted to ignore the significance of certain procedures
Baron et al, (2003), asserts that, large groups function differently in a number of important respects to
smaller groups. Size impacts on group communication, for example. In smaller groups a higher
proportion of people are likely to participate there is potential more time for each, and the smaller
number of people involved means that speaking may not be as anxiety-making as in a large group. In
addition, large groups are more likely to include people with a range of skills and this can allow for more
specialization of labour. In addition, larger groups can also allow us to feel more anonymous. As a
result, we may exhibit less social responsibility, which in turn will often lead to less task involvement
and lower morale on the part of many group members as size increases.

Gine and Karlan ,( 2006), assert that certain drawbacks of group lending exist, and thus the
demand for credit within a group may change overtime , forcing clients with small loans to be
liable for larger loans of their peer. The growth of group lending programmes may slow down
when new borrowers with looser social ties enter and consequently, the group lending
methodology loses its power.

2.1.3 Individual Characteristics

Forsyth, (2006) makes the point that Groups are not merely sets of aggregated, independent
individuals; instead they are unified social entities. Groups cannot be reduced down to the level of the
individual without losing information about the group unit, as a whole. The notion of group cohesion
the forces or bonds that bind individuals to be collective - is fundamental to an appreciation of groups.
In some groups the power of the bonds, the feelings that group members have for each other and the
20

extent to which they are prepared to cooperate to achieve their goals will be slight. In others these may
be seen as strong. Here the word seen is significant for it may well be that a group is not experienced
by its members as particularly co-operative, for example, but they, and those looking on, may believe it
to be a social entity, a whole.

Benson (2001) states that, group goals are ideals they are the ends (the aims or the
outcomes) sought by the group and its members. They entail some sort of joint vision and
without some commitment to the pursuit of common goals the group will not survive or be
effective.
The writer goes further to reiterate that, a co-operative goal structure develops when the
individual goals of members are visible and similar A competitive goal structure emerges
where the individual goals of members are hidden or seen as different or opposed .
According to Linkert, (1961) groups are most effective when the members are loyal to each other and
confident in each others abilities. Therefore, one way to increase the effectiveness of the group is to
work to instill confidence in each member. Confidence is built over time as members are allowed to
make decisions and others see the good results of those decisions. Eventually, each group member
knows that they can rely on their teammates to successfully achieve their responsibilities or effectively
communicate their needs.

2.2 Empirical Literature

An evaluation of ASA in 1996 by policy and operation department of the Netherlands
government, identified some of the weaknesses as: within groups, irregular credit practices do
occur, damaging solidarity and in extreme cases, lending to groups which have disintegrated,
institution was said to be so occupied with meeting their credit and repayment targets, that do

21

not help groups to resolve internal problems and group members are neither participatory nor
moving towards self sustainability.
In a Wall street Journal, Gallup survey 782 top executives in large corporations were
interviewed on the traits for success as a supervisor. in the study, the executives in the Gallup
survey identified integrity , industrious , leadership and ability to get along with people as three
most important traits for successful mangers. Other necessary traits included: knowledge,
intelligence, leadership ability, education, sound judgment, ability to communicate, flexibility
and ability to plan and set objectives.
In a study commission by African Microfinance Action Forum (AMAF) and the Womens World
Banking (WWB),(2007), found out that, the challenges to financial services delivery to lower
income markets in Africa, indicates that, the African Microfinance industry faces significant
challenges in pursuing its activities, which includes an unfavourable environment for clients and
MFIs , high operating cost environments , lack of human resources capacity, lack of access to
commercial funds , keeping the policy framework right, continuing to improve the legal and
regulatory environment and under developed meso levels, notably some markets also grapple
with either too much or too little competition.
In a study carried out in India, Shanjun, (2009) indicates that, positive peer effects, results in higher
repayment rate of other members , which increases ones own repayment likelihood, can derive from
increasing the cost of defaulting, encouraging more diligent work ethics, and inspiring reciprocity and
solidarity within groups. Members in a group are neighbors who know each other well, so they can
observe one anothers usage of the funds and distinguish deliberate default from default due to
irresponsible behaviors (such as investing in projects that are too risky, spending on alcohol and
22

tobacco, etc.) from default due to unexpected negative shocks. The repaying members can thus impose
social penalties to increase the cost of deliberate default and default due to irresponsible behaviors.
Social penalties can take the forms of despise, not providing help in their production and other activities
in the future. These penalties are severe in close-knit, poor communities, where people rely on each
other in their daily life and, to an even larger extent, during times of distress). On the other hand, a
member who defaults due to unexpected negative shocks is likely to be forgiven and covered by her
peers, which can give her high incentive to pay back if her situation gets better. Nevertheless, another
mechanism that has been raised that result in negative peer effects. The mechanism suggests that some
bad, nonpaying members can free ride off good, paying members by relying on the paying
members help to repay the loan even though they have the ability to repay on their own, that is, they
would repay in individual lending. The fact that the SHGs also serve as the organization base for
programs and activities other than group lending, implies that the potential social penalties can be very
severe and that the free-rider problem is likely to be small: Free-riders are likely to be kept out of the
groups through the intensive peer selection process and thus lose access to other programs
implemented by the groups. In addition, intensive interactions among group members also provide
larger incentive for members to repay their own part even if their peers do not: They can build or
maintain a good reputation, which would allow them to join other groups in the same village later,
should the group fail.. The positive and significant peer effects found from the study implies that a
higher repayment (default) rate of other members increases ones own repayment (default) likelihood.

Wakuloba, (2005), in a study carried on the causes of default in government microcredit

programmes in Uashi Gishu district, the study found out : poor business performance(36%) ,
domestic problems(20%), diversion of funds(10%), poor timings(6%), tenancy problems(6%),
theft(4%), business close down (2%) and others (10%).

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2.2 Research Gap

Numerous studies have been done on group lending in various places, however none has
been carried out in Sotik district and this research gap made the research to undertake the
research on group lending in Sotik district.

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CHAPTER THREE
Research Methodology
3.1. Introduction
This chapter present research design and methodology used in the study.This section also
described research design, target population, sampling design and sample size, data collection
methods, validity and reliability of research instruments and data analysis techniques.
3.2. RESEARCH DESIGN
Barbie, (1999), puts it that research design addresses the planning of scientific inquiry, and two
major aspects of research design are: first, specify precisely, what you want to find out and
secondly determine the best way of doing it. The researchers will use descriptive survey design
to determine factors influencing group lending. The design will enable the researcher to gather
information summarise interpret and present, (Orodho 2007).

3.3. Area of the Study

The study will be conducted in community group based microfinance institutions in Sotik
District of Bomet County.

25

3.4. Population of the study

The study will be conducted in three community based microfinance institution in Sotik district,
namely: Uswet Financial Services Association, Gelegele SACCO and Kotabgor SACCO. The
population of the study will comprise of (3) managers, (8) loan officers, (464) groups and 4272
group members.
3.5 Sample size and sampling procedure
Mentor et al (2011), puts it is the quality of a piece of research stands or falls not only by
appropriateness of methodology and instrumentation but also by the suitability of the sampling
strategy that has been adopted. The researcher will focus on the 3 group based community
microfinance institutions operating in Sotik District and from the primary visits made on the
institutions, the research got the target population from the respective managers, computed
and tabulated the information as below:

26

Table 1: population of the study and the sample size

Microfinance
managers

No. of groups

No. of customers

Loan

institution
officers
P
1

Kotabgor Women

362

64

2700

443

SACCO

Uswet FSA

60

14

900

148

Gelegele SACCO

42

14

672

105

464

92

4272

696

NB: P : Study Population S: Sample size

The Manager and one loan officer from each of the institution will participate in the study. To
identify a loan officer, the researcher will use simple random sampling, and in each of the
institution, names of the all officers will be obtained and the same written on a piece of paper
folded, put in a small container and shuffle, one paper will be picked at a time and name picked
will be listed, and the same refolded, and returned to the container. The process is repeated
until the three loans officers are identified.
To get the sample size of the group members, the researcher will use stratified simple random
sampling to get a proportionate number of groups in each of the institutions and in each of the
27

groups. By using Cohens d table, the researcher will sample 92 groups and subsequently,
sample 696 group members
Stratified simple random sampling will involve, first writing the names of the groups from each
of the institution, in a piece of paper, fold them and put them in a basket. They will be then
mixed and picked with replacement until the required sample has been picked. In case of
named picked twice it will be put back into the basket without recording it down. When the
number of groups has been sampled in each of the institutions a list of these groups will be
made, and consequently make a list of all the members in the group who have accessed loans;
In each group sampled a list of respondents will be identified by following the same steps used
in identifying the groups. A total of 697 group members from the sampled groups will be
attained, making a total of 702 respondents.

3.6. Data Sources

The sources of the data will be both primary and secondary sources
3.7 Data Collection Instruments
The data will be collected using questionnaire, and documents analysis. The questionnaire is
preferred because it will allow the researcher to reach a larger sample within a short time. It
also ensures confidentiality and thus gathers more candid and objectives responses. The
questionnaires will be prepared for the managers, loan officers, and the group members.

28

The secondary data will be collected through document analysis and will only focus on the
documents that are relevant such as credit policy and procedure manuals, institutions
performance reports, analysis group minutes books and group attendance registers.
3.8 Validity and Reliability
According to Mugenda and Mugenda (1999), validity refers to the accuracy and
meaningfulness of inferences which are based on the research results. It is the degree to
which results obtained from the analysis of the actual data represent the `phenomenon under
study.
Validity in the contest of this study is concern with establishing whether the questionnaires
content measures with the content validity
Best and Kahn (1989) suggest that the validity of the instrument is asking right questions are
formed in the least ambiguous way.
According to Litwin (1995), the reliability of an instrument is the measure of the degree to
which a research instruments yields consistent results or data after repeated trails in order to
test the reliability of the instrument used in the study. A Pearsons product moment formula
for the test - retest will be employed to compute the correlation coefficient in order to
establish the extent to which the contents of the questionnaire are consistent in eliciting the
same responses every time the instrument is administered. Correlation co efficient of about
0.8 should be considered high enough to judge the instrument as reliable for the study. To

29

ensure validity and reliability of the data a pre-test of the questionnaires will be carried out
before the actual collection of the data in the study is carried out.
3.8. Data Analysis Procedure
Data collected will be organized, processed and analysed. Descriptive statistics will be used to
analyse data guided by the objectives and questions of the study.
3.10 Ethical consideration
Permission to become a participant in this study will always be sought before administering the
questionnaires to any selected respondent (Oliver 2003). The participant will be given
assurance that their identity will remain anonymous in order to uphold their privacy for the
sake of any aspersions that may be cast on their business.

30

REFERENCES
Aronson, E. 1991, The Social Animal, 16th Ed, W.H .Freeman & Company, New York.
AMAF and WWB, 2007, Diagnostic to Action, Microfinance in Africa, AMFI, Kenya.
Babbie,E.1999, Practice of Social Research, Wadsworth, New York
Baron, et al .2003, Group Process, Group Decision, Group Action. 2e. Buckingham: Open University
Press.

Best, J. and Khan, J. 1989, Research In Education, 6th ed.Boston

Benson, J. 2001, Working More Creatively with Groups. London: Routledge

Craig K. 1991 , Kenya Informal Sector Delivery Capacity, Nairobi: Credit and Institutional
Development,kenya
Dessler, G. 2008). Human resource management (11th ed.). Upper Saddle River, NJ: Pearson.

Fowler A. and Kinyanjui K. 2004,, Indigenizing Foreign Seed on African Soil. The Story of K-Rep,
Acacia, Nairobi.
Forsyth, R. 1990, Group Dynamics 2e. Pacific Grove CA.: Brooks Cole.

Government of Kenya, 2007, Vision 2030, Government of Kenya, Government printer, Nairobi.
Government Of Kenya, 1992, Sessional Paper No.2 of 1992 on Small Enterprise and Jua Kali
Sector, Government Press, Nairobi.
Gine, X. and Karlan, D. (2006), Group Versus Individual Liability, A Field Experiment in
Phillipines, World Bank Policy Research Working Paper 4008, Washington.
Habitat, 1989, Co-operative Housing: Experiences of Mutua Self Help, Habitat, Nairobi,
Hatch, M. 1997, Organizational Theory, Modern Symbolic and Post Modern Perspective,
Oxford University Press, New. York.
INAFI 2007, Food Security, Rural Poverty and Microfinance, Nairobi Kenya.
INAFI, Millennium Development Goals, htt://www.inafi,org
Latifee, H.( 2009, Financial Inclusion: The Experience of Grameen Bank,Grameen Trust,Dhaka
Litwin, J.1995, How to Measure Survey Reliability and Validity, SAGE, California.

31

Lussier ,R. 2009,Management Fundamentals, Cengage,USA

Storey, D. 1983, The Small Firm, an International Survey, St. Martin Press, New York.
Shanjun,L.2009, How Important are Peer effects in Group Lending, International Food Policy
Research Institute.
Jain, P.1997, Managing Fast Expansion of Microcredit programmes. The Lesson from ASA, ASA
Press, Dhaka.
Kamal, M. 1997 , Causes of Default in Microcredit ,ASA Press, Dhaka Bangladesh.
Mentor, I. et al.2011, A Guide to Practitioner Research in Education, SAGE, Olivers Yard,
London.
Ministry of Finance and Planning .2001, Poverty Reduction, Strategy Paper 2001- 2004,
Government Press, Nairobi.
Mutua, et al.1996, It did not Happen Overnight, The History of Group, Based Credit
Programmes in Kenya, IMC,Nairobi.
Mugenda, M. and Mugenda, G.1999, Research Methods, Quantitative Approaches, Act,
Nairobi
Microfinance Insights, Nov/Dec. 2008, Vol.9, Microfinance in Africa, Harnessing the potential
of a continent.
Omendo, F. 2008, Effective Leadership, Paving the Way, Leading by Example, Aura Creation,
Nairobi.
Orodho , A.J. 2004, Techniques of writing Research , Proposal and Reports in Education and
Social Science, Masola publ, Nairobi
Policy and Evaluation Development Netherlands Government, (1996), Rural Development in
Bangladesh, A case for ASA, ASA Press, Dhaka.
Likert, R. 1961, New patterns of management. New York: McGraw-Hill.

Shaw M. 1981 , Group Dynamics ,The Psygology of Small Group Behavior, 3ed, McGraw Hill,
USA.
Vepa, R. 1984, How to Succeed in Small Industry, Vikas Hse, New Deheli
Wakuloba, R. 2005, Causes of Default in Government Microcredit Programmes, A Case of
Uashi Gishu District,
32

Appendix 1
QUESTIONNAIRE
Important Information

Please do not write your name on this questionnaire

All questionnaires are confidential

Put a Tick ( ) in the bracket provided, for the chosen

Alternative

SECTION A
1.

Name of the organization linked to the group ------------------------------------------------------

2.

Respondent ( ) Manager ( ) Loan officer ( ) group loanee

3.

(a) Gender ( ) Male ( ) Female

(b) Does gender has any influence in group loan repayment?
( ) Yes ( ) No
(c) If yes, which gender repays group loans better?
(d) Does age have any influence in loan repayment?
( ) Yes ( ) No

(e) If Yes, rank the following from 1 to 5, 1 being the best loan group repapers, while
5 being the worst defaulters:

Age category (years)

below 25
26 35
36 45
46 55

Rank ( 1- 5)

33

above 56

(e) (i) Does Level of education has any positive influence in group lending?
( ) Yes ( ) No
(ii) if yes, kindly rank them from 1 to 3, one being the most influencing level,
Level of education
primary
Secondary
University

Rank (1 -3)

SECTION B,

4.

(a) Does any of the following organizational factors influence lending in a

group? Indicate Yes or No in the table below.

Organizational factors

Responses
NO

YES
Organizations policies and
procedures
Loan officers level of skills
Terms and conditions of lending
Loan structure
Interest rates
Any other (s) specify

(b) In all the factors you have indicated a Yes, kindly rank them in order, from the
most to the least influencing factor.

34

5.

( a) Do group characteristics have any influence in group lending? indicate

a Yes or a No as detailed below:
Group characteristics

Responses
YES

NO

Group
formation
(
orientation and age)
Group structure ( group
leadership)
Composition of the group(
male/female, young and
old, religion and tribe)
Group cohesion
Rules and regulations
Other(s ) specify
(b) In all, the Yes responses, please rank them in order of the most influencing
factor to the least influencing factor in group lending.

6.

(a) Do individual characteristics in a group lending situation have any

influence? indicate a Yes or No as tabulated below:
Individual
characteristics

Responses
YES

NO

Adherence to group
rules
and
regulations
Meeting attendance
attitude
Any other ( specify)

7.

(a) In your own opinion, what would be the key determinants to group
lending in this district? Rank them in order from 1 to 3, 1 being the most important,
and 3 being the least.

35

Ranking (1-3)
key lending determinants
Organizational policies and
procedures
Group characteristics
Individual characteristics
8. (a) Is there anything that you will want to comment about the group , individual group
member and financier ? ( ) Yes ( ) No
(b) If yes, what comments?
(i)

Group ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(ii)

Individual
member
..

(iii)

Financier ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Thank you for taking your time to answer the questions

36

Appendix 2

Letter to the manager

The Manager,
.
.
.

Dear sir/madam,
RE: FACTORS INFLUENCING GROUP LENDING IN SOTIK DISTRICT.
I am a postgraduate student at Kabianga University College, and currently carrying out a
study on the above stated subject.
Your organization has been selected to take part on the study. I kindly request your
permission to gather the required information from you, your loan officers and group
members.
The questionnaires are specifically meant for research and the responses will be treated
with strict confidentiality.
Your assistance and support will highly be appreciated

Yours sincerely

Philip Cheruiyot
Post graduate student.

37

Appendix 3
WORK PLAN
This section presents the work plan of the researchers study activities for the entire period
in which the study will be conducted.
Activities
Proposal
writing
,submission &
defense
Pilot study
Data collection
Report writing
First draft of
research
papers
submission
Supervisors
corrections of
the research
paper
Writing of the
final
copy,
printing
&
binding
for
submission

June,2012

July,2012

Dec.2012
February,2013
March, 2013
March,2013

Jan,2013

August , September,
2012
2012

April ,2013

May,2013

38

October,201 November,201
2
2

Appendix 4
Budget for the study
This section presents the cost of conducting the whole research which includes preparation,
data collection and compilation of the final research report.
Item description

Quantity

Unit cost in Total cost in Kshs.

Kshs.

Stationery
Duplicating papers
Biro pens
HB pencils
Files
Computer services
Rubber
Typesetting , printing,
and binding

4
10
6
6
1
6
4

400
10
20
40
500
10
1200

1600
100
120
240
500
60
4800

Sub. Total

7,420

120
500
150
Sub. Total
10%
miscellaneous

6000
7500
2250
15,750
2317

Other expenses
Transport ( petrol fuel)
Lunch
Out of pocket
Add

50
15
15

Estimated total cost

25,487

39