ONE: INTRODUCTION
1.0. Introduction
This chapter presents the background of the study, statement of the problem, objectives of the study and the hypotheses that will guid the study. The significance and the scope of the study are also discussed.
1.1. Background of the Study
The high level of unemployment in Kenya is high having been approximated to stand at 39.1% by The United Nations, Human Development Index (HDI), (2017), and being the highest within the East African region. The Small and Medium Enterprises (SMEs) are termed as the ‘Lifeblood’ of any world’s economy (Ayyagari et al, 2007) and no government can ignore the existence of SMEs since they contribute immensely on the economic growth and development innovation (Kiraithe P., 2016). The SMEs having been known to generate employment opportunities to the population, the unemployed youths have engaged themselves in the sector where they use their skills and talents in creating commercial innovations of high quality, sources and means of their livelihoods has they improve the country’s economic development (Youth Employment Marshall Plan, 2012), (Sagwe, Gicharu & Mahea, 2011). By this, there is growing recognition of the important role Youth owned small and Medium sized Enterprises (SMEs) play in economic development of every country. SMEs have the capacity to achieve rapid economic growth while generating a considerable extent of employment opportunities (Reddy, 1991).
Studies indicate that in both advanced economies and developing countries SMEs contribute on an average 60 percent of total formal employment in the manufacturing sector (Ayyagari et al, 2007). For African economies, the contribution of the SME sector to job opportunities is even more important. Taking into account the contribution of the informal sector, SMEs account for about 75% of total employment in manufacturing (Ayyagari et al, 2007). The importance of SMEs in Kenya was first recognized in the International Labor Organization report on ‘Employment, Income and Equity in Kenya’ in 1972. The report underscored SMEs as an engine for employment and income growth. SMEs create about 85 percent of Kenya’s employment (African Economic Outlook, 2011 report).
It must be borne in mind that Youth unemployment is one of the greatest challenges faced by developing countries currently (Muthee M. W., 2010). Indeed about 15 million people are classified as those who live below the poverty line in Kenya, with three million indicated as unemployed (Gumbo T., 2010). Youth account for about 50% of the unemployed in Kenya, implying that unemployment is a major youth challenge (Ouma E Osano & P. Murlumbi F., 2002).
A number of youths have therefore resulted in undertaking Small and Medium sized enterprises to earn a living and to move out of the poverty bracket (GOK Youth Enterprise Status Report, Nairobi, 2015). For the youths to be able to thrive in the SMEs sector the entrepreneurial skills are crucial in order to compete effectively for the market niche. A crucial element in the development of the SME sector is access to finance, particularly to bank financing, given the relative importance of the banking sector in serving this segment. More importantly, a number of studies using firm’level survey data have shown that SMEs not only perceive access to finance and cost of credit to be greater obstacles than large firms, but these factors constrain SMEs performance more than large firms (Schiffer and Weder, 2001; IADB, 2004; Beck, Demirg”-Kunt, and Maksimovic, 2005; and Beck, Demirg”-Kunt, Laeven, and Maksimovic, 2006). For the SMEs to be able to contribute adequately to the economic development, sufficient operational capital is very vital. The capital should be with low risks and transaction cost to enable the thriving of the SME entity. This can be well articulated through the MFI strategies that are focused on delivering competitive, low cost and accessible financial facilities.
The access to capital is very crucial to the SMEs especially while the entity is on its growth and establishment stage it may hamper its resilience muscles and result to entity stunted growth. Now the Microfinance institutions initiate the entrepreneurial intensity and adopt the strategies that enable support of credit lending at affordable cost to sustain the growth of the SMEs through competitive micro finance strategies. These microfinance strategies should put in mind the characteristics of the SMEs sector, to ensure that they do not expose the sector to more economic risks but assist in facilitating the SMEs to access credit facilities to grow their business. This proposed study is essential for it will help in understanding the moderating effect of entrepreneurial intensity on the relationship between micro finance strategies and the growth of youth enterprises with emphasis on Taita Taveta County.
1.2. Problem Statement
Lack of access to adequate credit for working capital and long-term investment purpose has been cited as one of the major constraints that SMEs face in their operations in Kenya and other developing countries. The World Bank report, (2010) suggests that one of the major causes of SME failure is limited access to external finance. The report further highlights that, loans offered to SMEs by the banks is generally lesser percentage compared to that loaned to large firms. Approximately ten percent (10%) of all formal SMEs have access to a bank credit line. Finance is the life-blood of any business enterprise and no enterprise, no matter how well managed, can survive without enough funds for working capital, fixed assets investment, employment of skilled employees and development of markets and new products (Agnew, 2003). Therefore, access to finance is essential to the survival and performance of any business enterprise. Nondi and Achoki, (2006), in a survey of financial management problems in small hotels and restaurants in Kenya, found that 26 percent of these establishments reported lack of working capital as the most serious problem they face in their operations.
Research by Mwamadzingo and Ndung'u, (1999) which focused on the commercialization of innovations in Kenya also found that small scale firms experience great difficulty in attracting investment funds, which inhibits their ability to adopt modern methods of production. Also the micro finance institutions should ensure they adopt the entrepreneurial intensity in seeing that they encourage the growth of the SMEs through offering focused, cost friendly and competitive financial credit facilities. In this study, the moderating effect of entrepreneurial intensity on the relationship between micro finance strategies and the growth of youth enterprises will be undertaken. However, there is a paucity of studies in Kenya that have assessed the moderating effect of entrepreneurial intensity on the relationship between microfinance strategies and the growth of youth enterprises, thus proposal of this study in to undercover this by using Taita Taveta county as area of the study.
1.3. Objective of the Study
The main objective of this study is to understand and highlight the Moderating Effect of Entrepreneurial Intensity on the Relationship between Microfinance Strategies and the Growth of Youth Enterprises with focus to Taita Taveta County, in Kenya.
1.3.1. Specific objectives
The study will be guided by the following objectives
i. To assess the effect of credit access strategies of microfinance institution influence the growth of youth owned small and micro enterprises.
ii. To examine the effect of micro savings strategies from microfinance institutions on growth of youth owned small and micro enterprises.
iii. To establish the influence of capacity building strategies of microfinance institutions on growth of youth owned small and micro enterprises.
iv. To establish the effect of Entrepreneurial Intensity (E.I) on the SMEs growth of youth enterprises.
v. To establish the moderating effect of entrepreneurial intensity on the relationship between; a) Credit access strategies and growth of youth enterprises, b)Micro savings strategies and growth of Youth Enterprises, c) Capacity access strategy and growth of Youth Enterprises.
1.4. Research Questions
The following questions will guide the study:
i. To what extent does accessibility to credit facilities from Microfinance Institutions influence the growth of youth owned small and micro enterprises?
ii. How does the Micro-Savings strategies of Micro-finance Institutions influence the growth of youth owned small and micro enterprises?
iii. To what extent does Entrepreneurial Intensity of micro finance institutions influence the growth of youth enterprises?
iv. How does the capacity building offered by Micro finance Institutions influence the growth of youth owned small and micro enterprises?
v. The moderating effect of entrepreneurial intensity on the relationship between; a) Credit access strategies and growth of youth enterprises, b)Micro savings strategies and growth of Youth Enterprises, c) Capacity access strategy and growth of Youth Enterprises.
1.5. Research hypotheses
i. The credit access strategies do not significantly affect growth of youth enterprises.
ii. The Entrepreneurial intensity does not significantly moderate the relationship between the micro finance strategies and youth enterprises.
iii. The effect of micro savings strategies from micro finance institutions does not affect the growth of youth owned SMEs.
iv. The capacity building trainings offered by Micro finance Institutions does not influence the growth of youth owned small and micro enterprises
1.6. Scope and limitation of the study
The study will concentrate on the moderating effect of the entrepreneurial intensity on the relationship between micro finance strategies and the growth of youth enterprises in Taita Taveta County. The study will involve only the MFIs institutions and youths or groups of youths operated SMEs operating in Taita Taveta County and are registered with the ministry of gender, youths and sports. The study will be limited to the responses of the respondents and discussed with the available literature and the researcher’s insight and understanding. The researcher will ensure that all the respondents will be coded to avoid any discloser of the true identity to protect them and their businesses from any negative effect as a result of participating on the study.
1.7. Significance of the Study
The study is expected to be important to the commercial banks in Kenya, government, academia and other stakeholders. In the academia field, the results of this study is a contribution to the existing store of knowledge on the subject and serve as a catalyst for further research on innovative ways of financing SME. It is useful as a source of reference to researchers, academics, policy makers, students and other stakeholders interested in financing challenges faced by SMEs. In bank management, this study would provide data that may help to better understand banks’ involvement with SMEs. This also include to identify ‘best practices’ in commercial bank involvement with SMEs, including key factors and links among business models, processes, tools, as well as the actual performance in SME bankingTo policy makers like government agencies such as the Ministry of Finance and Ministry of Industrialization, the findings and results of the study would provide insight and a more reliable guide for monitoring the financing challenges of SMEs. The study would provide data that may help understand the needed finances for banks to provide quality service to SME consumers and to ensure that their systems achieve the highest level of efficiency in provision of financing. To other stakeholders like investors, shareholders, employees etc., the study provides information for suggesting improvement in ‘relationship lending’, a type of financing based primarily on ‘soft’ information gathered by the loan officers through continuous, personalized, direct contacts with SMEs, their owners and managers, and the local community in which they operate of the respective banks in Kenya.
1.8. The assumption of the study
This study will be based on the following assumption: That all registered youth groups access or intend to access microcredit facility from microfinance institutions in Taita Taveta County. It will also be assumed that all the respondents provided unbiased responses and the MFI institution under study provides training to its clients. Lastly it will also be assumed that the MFI institutions provides micro saving facilities to SMEs in Taita Taveta County. The respondents both from youth SMEs and MFIs staff will be available at the time of data collection.
1.9. Limitations of the study
Since the sample respondents will be drawn from the register from the department of ministry of gender, youth and sports and are operating in Taita Taveta County, the effects found will mainly be reflective of the situation in the county. Hence, the findings may not be representative of all other youths MSEs operating in other Counties let alone the whole country.
1.10. Definition of terms
1.10.1. Growth
The growth of an enterprise is reflected in increased sales, new and improved products and increased market share. In this study it will be measured in many ways such as turnover, profits, and number of people employed and in market and technology domain of the youth owned SMEs.
1.10.2. Microcredit
This is extension of very small loans to improve shed borrowers who typically lack collateral, steady employment and veritable credit history, it is designed not only to support entrepreneurship and alleviate poverty but also in many cases to empower woman and uplift entire communities by extension.
1.10.3. Microfinance
According to Menon, (2005), microfinance or micro-credit is the extension of small loans to individuals who are too poor to qualify for traditional bank loans, as they have no assets to be offered as guarantee. Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services (Christen, Rosenberg and Jayadeva, 2004).
1.10.4. Small and Micro enterprise (SME)
Micro enterprises employ between 0’5 workers, whereas small enterprises have 6’20 workers (ROK, 1999). For this study micro and small enterprise (MSE) comprised 0’20 employees.
1.10.5. Youth entrepreneurship
This is the process when youth organize all factors of production undertake risks and provide employment to others. youth entrepreneurship is an economic activity of those youth who think of a business enterprise initiate it organize and combine the factors of production operate the enterprise and undertake risks and handle economic uncertainty involved in running a business enterprises (Medha Pubhashi Vinza, 1987).
1.10.6. Entrepreneurial Intensity
This is the measure of the degree of entrepreneurship and the frequency or the number of events in which a firm is entrepreneurial. That is, it ought to be a two-dimensional phenomenon (Morris and Sexton, 1996).
CHAPTER TWO: LITERATURE REVIEW
2.0. Introduction
The issue of credit seeking by business entities it has been one of the greatest need for the SMEs development and growth. It has been recognized that providing credit services, savings mobilization and training or capacity building by microfinance institutions could conceivably help in the growth and expansion of SMEs (Olu, 2009; Wanjohi and Mugure, 2008; Ogindo, 2006). Entrepreneurship theory and studies in institutional economics both hold that it is new, creative, technically innovative ideas and institutions that are the key catalysing factors in economic development (Schumpeter, 1987; Drucker, 1985; North, 1990; Baumol et al., 2007). To develop in a sustainable fashion and thus to reduce poverty, developing countries need to master key technologies, better understand ‘state of the art’ industrial products and processes, develop and manufacture at least some of their own innovations in domestic microenterprises and SMEs, and establish a tissue of pro-active development-focused institutions (see UNCTAD, 2003; Amsden, 2007; Chang, 2007; Oyelaran-Oyeyinka and Rasiah, 2009). This would only be possible if both microfinance institutions and SMEs have sufficient entrepreneurial intensity.
2.0.1. Credit Financing
Debt financing for SMEs in developing countries is mainly limited to bank loans and trade credit (Organization for Economic Cooperation and Development, 2006). According to Rungani, (2009) commercial banks are a principal source of debt finance for new SMEs. Commercial banks offer new SMEs a wide range of services in their own right or through wholly or partially owned subsidiaries. These services cover every aspect of the financial market such as trade bill financing, term loans, overdraft facilities, leasing, factoring, export and import finance and even government loan guarantee schemes.
Commercial banks are in a better position to gather information on SMEs through established relationships which they and their staff have with SMEs and their owners. In addition, commercial banks have extensive branch networks that can be accessed by new SMEs even in remote locations. Furthermore, the financial conditions of small firms are usually rather opaque to investors and the costs of issuing securities directly to the public are impossible for most SMEs. Hence, without financial intermediaries like banks it would simply be too costly for most investors to learn the information needed to provide the credit, and too costly for the small firm to issue the credit itself.
Banks, performing the classic functions of financial intermediaries, solve these problems by producing information about borrowers and monitoring them over time, by setting loan contract terms to improve borrower incentives, by renegotiating the terms if and when the borrower is in financial difficulty. In addition, Feakins, (2005) points out that term loans and overdrafts as the two major products offered by commercial banks basically offer to new SMEs. Pandula, (2011) found that SMEs who are the members of SME representative societies or enterprises such as the Chamber of Commerce have a high probability of accessing bank finance. According to Pandula, (2011) these societies have close contacts and relationships with SME owners/managers and are aware of the problems and needs of their members. Therefore, these societies and other business associations can play a key role in assisting their members to access bank loans from banks Pandula, (2011). However, access to credit is still a challenge to most SMEs, especially those in developing economies and it is also still a key issue both within the private and public sector. In Kenya, the lack of adequate access to credit is the leading factor stifling the growth of youth Enterprises (Wanjohi and Mugure, 2008).
Very demanding requirements, in addition to the bureaucratic lending procedures by the financial institutions is the biggest challenge to credit access by SMEs. This has lead most SMEs to resort to informal financial institutions such as shylocks, savings and loans companies, relatives and friends.
The SMEs sector accounts for 75% of the total employment in Kenya while contributing 18.4 percent of the country’s Gross Domestic Product. According to GoK, (2009), in the recent years the performance of the SMEs has continued to decline in Kenya. Virtually most small enterprises had collapsed leading to the closure of some of the SMEs that were producing 40% of the employment in Kenya. Other SMEs were auctioned while some were merged or acquired signifying questionable financial performance due to lack of proper management of debt acquired. Generally speaking, financial constraints remain a major challenge facing SMEs in Kenya (Wanjohi and Mugure, 2008) this is because the SMEs have little access to finance, further Hallberg, (1998), and Mead & Liedholm, (1998) in their study confirmed that access to finance is an important ingredient to developmental and eventual growth and performance of SMEs. SMEs and other businesses rely on banks for major source of financing, though the SMEs rarely meet the conditions set by the financial institutions, and the same time fail to present a guarantee or any supportive information about their ability to repay loans, it is therefore due to these reasons that banks and other financial institutions perceive SMEs as risky (Kariuki, 1995). According to World Bank, (2006) Africa has the largest informal sectors in the world, this makes most of the SMEs in Kenya to be in the same informal sector with very limited opportunities for growth. In Kenya, availability and access to finance to SMEs has proven to be tremendously difficult, access to external finance is advantageous because it improves market selection by allowing small firms to be more competitive (Aghion, 2007).
2.1. The Micro finance strategies
Micro finance strategies are those activities that the microfinance institutions use to access, market and retain their market catchments areas and target populations. The provenance of micro financing was the need to provide for low-income earners who were left out by formal financial institutions. The modern use of the term micro financing can be traced to the 1970s when the microfinance pioneer Mohammad Yunus working with organizations, such as Grameen Bank of Bangladesh, started lending out to the poor (Yunus,2007; Wahid, 1994). Microfinance emerged in Kenya in the late 1980s due to the need to provide credit to individuals, micro, small and medium enterprises, which felt left out by the formal banking system (Ogindo, 2006). Robinson, (1998) defines microfinance as a development too that grants or provides financial services and products such as very small loans, savings, micro leasing, micro insurance and money transfer to assist the very or exceptionally poor in expanding or establishing their SMEs. Services offered by micro finance institutions include provision of small loans, savings mobilization and training or capacity building of SMEs staff.
Microfinance activities could influence the growth of SMEs. For instance, Olu, (2009) in a study of the impact microfinance has on entrepreneurial development in Nigeria, found that the financial industry has positively influenced business organisations. The provision of credit by microfinance institutions to SMEs could be pertinent for their survival and growth, since access to credit has been pointed out to be a major challenge to most SMEs, especially those in developing economies like Kenya (Wanjohi and Mugure, 2008). The relationship between innovativeness, risk-taking, and pro-activeness and the frequency by which they occur amongst both microfinance institutions and SMEs on the one hand and the growth of the SMEs on the other has not been well investigated.
The financial system plays a critical role in strengthening and establishing firms. Production schemes, especially long-term, large-scale projects, need a system capable of capturing and allocating the resources of multiple savers (Bencivenga and Smith, 1991). Micro-enterprises and small firms usually have limited resources of their own and look to the financial system for the means to set up or grow their business. The financial system has five main functions as an engine of industrial development. The first is to reduce risk through coverage, commerce and diversification (Bencivenga and Smith, 1991). This function is essential for technological innovation, which is typically a long, slow process (Audretsch, Werner and Mahagaonkar, 2009). The second function is to compile information and allocate resources. By reducing information asymmetries between lenders and borrowers, the financial system channels resources to the most productive sectors, encouraging economic efficiency and social well-being (Greenwood and Jovanovic, 1990; Habibullah and Eng, 2006). The third function is to mobilize individual and grouped savers looking to invest their resources. The financial system brings together the resources of numerous savers for allocation to large and productive projects (Sirri and Tufano, 1995).
The fourth function is to reduce the costs of compiling the information needed to enforce contracts and oversee the behaviour of borrower firms. This function promotes capital accumulation and efficient resource allocation and, consequently, long-term growth (Levine, 1997; Rajan and Zingales, 1998). The fifth and final function is to facilitate specialization by reducing transaction costs. Specialization allows firms to concentrate on production activity, by giving them the space to improve their processes and products and thus increase their productivity (Stiglitz, 1989; Greenwood and Smith, 1997; Cooley and Smith, 1998).
In this study the researcher will try and examine the strategies the MFIs are using in reaching the youth SMEs to influence their growth and how the entrepreneurial intensity moderate it.
2.1.1. Competitive strategies
These strategies seeks establishment of a profitable and sustainable position against the forces that determine industry competition. Porter, (1985) points out that the competitive strategies are involved in attracting customers, withstanding competitive pressure and strengthen the organization markets position. Hax and Majhif, (1996) it involves positioning the firms to respond adequately to the opportunities and threats, internal strengths and weakness in order to achieve a sustainable competitive advantage in every business. These sources of competitive advantages involves high quality products, superior customer service and achieving lower cost than competitors. The business strategies involves means to obtain competitive advantage over your business rival (Porter, 1980). The firm that do not handle effectively increased competition are not likely to succeed in business (Porter, 1996).
2.1.2. Market entry strategy.
These strategies involves the acquiring, strategic alliances and joint ventures. The firms develop new products and widen their portfolio and spread the risk aboard several products in the markets covered by the firm (Greenstein, 2002) the businesses may build and protect their current existing markets position for the same products they have been selling, retention of customers. Thompson and Strickland, (2003) points that, firms uses defensive strategies, offensive strategies and process innovative strategies.
2.1.3. Cooperative strategy
Hunger and Wheelen, (1995) recommends firms to employ cooperative strategies in order to benefit within an industrial sector by working with other firms, often referred to as strategic alliances. In this strategy firms are able to enjoy the strengths of their partner firm and also be able to share the risks that could be available in that market and lead to widening their market catchment.
2.1.4. Low cost strategy.
Firms using the low cost strategies can sustain their low cost position and increase their profit margins. On this, firms are able to increase their market threshold which widens the firms profit without increasing risk of competition from other firms interested in that market segment. Low pricing strategy helps the firms to defend their price wars, attacks competitions on price and market niche; if dominant in the sector maintain exceptional returns (Peace and Robinson, 1991).
2.1.5. Broad differentiation strategy
The strategy seeks to ensure uniqueness of the firm products from others in the markets throughout the industry. By this strategy the firm seeks to build products of high quality in attempts to sustain customer loyalty. This equate to the ability of the firms in charging a premium price for it (Pearce and Robinson, 2001).
2.1.6. The best cost provider strategy
This strategy offers the customers value for their money through ensuring products are of high quality at lower price than that of their rival company (Thompson, Strickland and Gamble, 2008). This strategy seeks to outweigh any introduction of substitute goods or alternative goods that can compete with firm’s products and services at the disadvantage of the firm dominance.
2.1.7. Focused strategy
It focuses on a selected market segment and out competes the rival firms by providing goods or services that meet their taste behold their competitors (Thompson, Strickland and Gamble, 2008). This strategy is one of the most sophisticated and formulated focusing on the targeted market segment, in a manner that other rival firms cannot compete. This strategy is employed by firms seeking to serve a isolated ares, serving customers with specific financial need, like youths; serving customers with specific financial need, inventory or small in size.
2.2. Concept of Entrepreneurial Intensity
Despite the significant role played by the SMEs in the country, they continue to face important hurdles, with statistics indicating that three out of five businesses fail within the first few months of operation (Kenya National Bureau of Statistics, 2007). In addition, many of the SMEs stagnate, failing to grow and graduate to medium ‘ sized firms (Ferrand, 1999; GEMINI, 1991). One important ingredient that might help to sustain and expand the SMEs is their embrace of entrepreneurship, one of the four mainstream economic factors, the others being land, labour and capital (Holt, 2001). Entrepreneurship has gained recognition as an important way to attain a sustainable competitive advantage and positive financial returns in the new economy (Covin and Slevin, 1991; Lumpkin and Dess, 1996; Goosen, 2002). Peters, (1987) has argued that entrepreneurial attitudes and behaviors are a key determinant of the ability of firms to survive and prosper in the turbulent environments confronting many industries today.
Although considerable divergence abounds on the concept of entrepreneurship, it might be defined as the process of creating value by bringing together a unique package of resources to exploit opportunity (Stevenson et al., 1989). There has been emerging consensus that entrepreneurship involves a behavioral process rather a collection of personality traits and is opportunity driven (Covin and Slevin, 1991). Key researchers (for instance, Covin and Lumpkin, 2011; Covin and Slevin, 1989; and Miles and Arnold, 1991) identify a triad of dimensions underlying entrepreneurial attitudes and behaviors, namely, innovativeness, risk-taking, and pro-activeness. Innovativeness is the seeking of novel, unusual, or creative solutions to problems and needs whereas risk-taking is the willingness to commit substantial resources to opportunities or ventures that could fail. On the other hand, pro-activeness is the performance of all activities necessary to bring an entrepreneurial concept to fruition. Thus, an entrepreneurial event usually consists of the three ingredients, innovativeness, risk-taking, and proactiveness and has been labeled as entrepreneurial orientation (EO) (Barringer and Bluedorn, 1999; Kreiser et al., 2002).
However, EO has been criticized as being one-dimensional, as it only measures the degree of entrepreneurship (Morris and Sexton, 1996). It has been argued that entrepreneurship should also include the frequency or the number of events in which a firm is entrepreneurial, that is, it ought to be a two-dimensional phenomenon (Morris and Sexton, 1996). Entrepreneurial intensity (EI) is the term given to this two-dimensional view of the phenomenon, which measures both the frequency and degree of entrepreneurial events. According to Morris and Sexton, (1996) entrepreneurship is not an either/or determination, but a question of ‘how often’ and ‘how much’. There has been a growing research output to support the concept of entrepreneurial intensity. Keats and Bracker, (1988) use the term to characterize different types of entrepreneurs and show that organizational performance is influenced by intensity. Erasmus and Scheepers, (2008) in a study of Johannesburg Securities Exchange listed companies found that entrepreneurial intensity was positively correlated with shareholder value creation. Cheah, (1990) proposes a continuum of entrepreneurial possibilities based on the extent to which the entrepreneur is creating significant new profit opportunities versus capitalizing on available opportunities. The effect of entrepreneurial intensity on the relationship between microfinance strategies and growth of youth enterprises in Kenya have not been well investigated. This study proposes to investigate the effects of entrepreneurial intensity amongst both microfinance institutions and SMEs on the growth of the latter.
2.3. Youth enterprises in Taita Taveta County
The number of youth Enterprises are growing rapidly in Kenya (Sessional paper, 2005, World Bank report), and this is not in exception of the Taita Taveta County. In Taita Taveta we have SMEs operating focusing in agricultural produce, ranching, small scale mining, telecommunication, hotel and restaurant, wholesale and retail enterprises, private education institutions, tourism industries among others.
2.4. Measurement of Growth of Youth Owned Enterprises
SMEs performance may be measured using subjective, objective, or operational measures (Schayek, 2011). Richard, Devinney, Yip and Johnson, (2008) suggest the goal approach as a composite measure of SME performance. The goal approach measures performance using non-financial (subjective) and financial (objective) measures.
Financial measures of performance can be referred to as the results of a firm’s operations in monetary terms (Business Directory, 2011). Financial measures of performance are derived from the accounts of a firm or can be found in the firm’s profit and loss statement or the balance sheet. Financial measures are also referred to as objective measures because they can be individually measured and verified (Kellen, 2003). Return on Assets (ROA): Cooke and Uchida, (2204) suggest that the return on assets (ROA) is used as a vital measure of profitability. The ROA provides information about how much profits are generated, on average, by each unit of the assets of the firm (Petersen and Schoeman, 2008). In addition, Petersen and Schoeman, (2008) note that ROA can be measured suing the equation, ROA = Net Profit after Tax ” Total Equity. This suggests that ROA is an indicator of how efficiently a firm is being operated with the assets available to the firm.
2.4.1. Return on Equity (ROE):
ROE should be the starting point for any systematic analysis of firm performance (Watson, 2007). ROE relates the earnings left over for equity investors after debt service costs have been factored into the equity invested in the firm (Damoradan, 2007). The equation used to measure ROE can be represented as:
ROE = Net Profit after Interest before Tax ” Total Equity
2.4.2. Profitability Growth:
This is the growth in the profits of a firm. Profitability growth can also refer to the continuous increase in the financial profit after all expenses have been paid over a given period on time (Business Dictionary, 2011). An increase in the profitability of a firm is an objective measure of performance as it shows that the firm is continuously improving. Sales growth: This refers to an increase in sales over a specific period of time, usually but not always annually. Delmar, Davidson and Gartner, (2003) suggest that if there is one measure of SME performance that could be used then it has to be sales growth.
Schayek, (2011) argues that most SME owners/managers are very sensitive about disclosing information relating to their firm’s financial performance. In addition Watson, (2007) suggests that because most SMEs are not required to report and publish their financial records, it is difficult to obtain, directly, the financial figures on sales and profitability of most SMEs. Therefore, most research studies such as Lechner, Dowling and Welpe, (2006) and Watson, (2007) have developed the use of a five point Likert scale which measures sales growth and profitability growth as financial performance measures. A similar technique is used by Sawyerr et al. (2003) Thrikawala, (2011) and Watson, (2011). This approach is implemented as it avoids the direct approach of asking for sales or profitability figures but infers the performance, indirectly, through the responses on the level of satisfaction with sales and profitability growth of the firm. However, it is important to note that sales and profitability growth should not be viewed in isolation as profits and sales may increase as a result of some underlying factor such as price increases or sales promotions, respectively, and not due to the improved performance of the firm or its products.
2.5. Theoretical Framework
2.5.1. The Static Trade-Off Theory
According to Andree and Kallberg, (2008) the origin of modern capital structure theory lies in the work of Modigliani and Miller, (1958) in their proposition ‘ often referred to as the ‘irrelevance theorem’. The theorem suggests that, as an implication of equilibrium in perfect capital markets, the choice of capital structure does not affect a firm’s market value. However, the theory proposed by Miller and Modigliani, (1958) was revised in 1963 to represent a real life scenario. Modigliani and Miller, (1963) introduced the effect of tax and interest deductibility of debt. By revising the two propositions, Miller and Modigliani, (1963) showed the effect of tax rates and interest rate deductibility on the capital structure and expected return of the firm’s shares. Firms, through interest rate deductibility of debt, could shift payments from going to the government and instead direct them to the firm’s shareholders and creditors by increasing leverage (Miller and Modigliani, 1963). The tax deductible effect of interest on debt creates tax savings for the firm and makes debt financing cheaper than equity finance. Miller and Modigliani, (1963) suggested that a firm should have 100% debt in its capital structure and this enables the firm to take absolute advantage of the tax-shield. However, Scott, (1972) argues that, theoretically, 100% tax shield does not exist in reality because of the interest repayment obligations of debt. Debt leads to a legal obligation to pay interest and principal. If a firm cannot meet its debt obligations it is forced into bankruptcy and incurs associated costs.
Berger and Udell, (2006) pointed out since the seminal work of Modigliani and Miller, (1958 and 1963) on the significance of capital structure, yet the seemingly simple question of how firms should best finance their assets remains a contentious issue. Although there is no consensus, two other competing theories have emerged. These are the agency theory and the pecking order theory.
2.5.2. Grameen Bank Model
The Grameen bank model was proposed and developed by Prof Yunus focusing on providing microfinance to the poor grassroots’ women in Indonesia (www.grameenresearch-org). The Grameen banking model sees the access to credit as catalyst to development process. The model removes collateral requirements and instead developed a MFI system based on mutual trust, accountability, active participation, supervision by MFI officers and creativity. Prof. Yunus developed this model to assist the poor women who could not afford or access the credit facilities due to lack of collateral and other required guarantees due to their social economic status to be able to access loan at affordable rates. The Grameen model sees the development of human capital as increase of access to technology, for example mobile phones green energy; solar power.
The model adopts the strategy were the micro finance institution sets up a branch and puts a Field manager with a few workers to cover 15 to 22 villages. The branch is interconnected with the headquarters through the network interconnection link while it’s serving customers at their doorstep. The MFI staff and the manager visit the locals to familiarize with their livelihoods and creating awareness of the MIF operations and services to the villagers as they recruit those who qualify as potential clientele.
The prospective borrowers are organized and placed in groups of five and initially only two of them are eligible to receive the credit service will the other members act like ‘social collateral’. Members in the formed groups they should not be relative. The group is observed for a month and seen if it abide with the set rules. A training of five days was done to all the members of the group on financial management. The group leader would collect the loan repayments and savings before the meeting and hand it over to the Centre leader and hand it over to the field officer during the meeting. The group members would meet every week to discussing the financial matters under observation of a MFI officer and no social matters were discussed. When the two borrowers repay the loan together with the interest in a fifty week time, other members of the group become eligible for the loan. Due to this social accountability by group members there is pressure from the group to keep the individual records clear. If any of the members defaults the loan the group members would pull resource to ensure the MFI has been paid the loan and if the group fails to pay they are denied subsequent loans.
2.6. CONCEPTUAL FRAMEWORK
Intervening variable
Independent variable Dependent variable
CHAPTER THERE: METHODOLOGY
3.0. Introduction
The research undertaking is a well thought intervention such that the researcher works with a blueprint that guide his work from the beginning to the end. This blueprint is the research design. According to Parahoo (1997), research design is, ‘a plan that describes how, when and where data are to be collected and analyzed.’ In this chapter the modalities of how the study will be implemented with a focus on delivering the study objective is discussed. It describes the research project design, and how it will be conducted, highlighting the study population, the sample size and sampling procedure, data sources and instruments of data collection and their validity and reliability for the study. It also gives the procedures to be adopted in data collection, analysis management and dissemination. Finally, it highlights the ethical considerations for the study.
3.1. Research design
The study will focuses on the moderating effect of entrepreneurial intensity on the relationship between Micro Finance strategies and the growth of Youth Enterprises in Taita Taveta County in Kenya and a survey research design will suit this study. In this study, quantitative research methods will be used to enable obtaining data from the target population.
3.2. Target population
The study target two populations. One; the employees of MFIs operating within Taita Taveta who are dealing with strategies formulation and implementation and the SMEs entities run by youths as individuals or as a group and which are registered with the ministry of youth’s gender and sports at county level. The reason this study is targeting the youths is that, youths have been rated to be starting SMEs entities to provide employment since rate of unemployment in Kenya has been increasing and recorded at 39.1% (UN, Human Development Index, 2017; Youth Employment Marshall Plan, 2012; Sagwe, Gicharu & Mahea, 2011). With this, the researcher will be able to examine how the growth of Youth enterprises and the MIFs strategies are moderated by the entrepreneurial intensity.
3.3. Sample size and sampling procedure
The sample size of the study will be determined through the use of Cochran’s sample size formula. This formula has been chosen for the study since it can be adjusted to work out in getting samples in both large and small populations.
The formula to be adopted if the population will exceeded 1000 is as below.
Where; e= the desired level of precision (margin of error)
P= the (estimated proportion of the population which has the attribute in question.
q= 1+p
If the population will exceed 1000 the below formula will be adopted.
Where no = Cochran’s sample size recommendations
N= the population size and
n= the new, adjusted sample size.
When the sample size will have been determined from the registered youths and enterprises with the ministry of youth gender and sports. The researcher will key the data in an excel work sheet and through using the excel work sheets researcher will use the data analysis tool pack be able to select the youths/youths SMEs registered with the department at a given nth to attain the systematic sample for the study.
The sample size for the respondents working in MFIs operating within Taita Taveta will be attained through none probability sampling of which each MFI two questionnaires will be issued.
3.4. Data sources and data collection instruments
The primary data will be used for the study collected through the use of questionnaires administered to youths operating SMEs entities within Taita Taveta county and are registered with the ministry of youths gender and sports. Mugenda and Mugenda (2003), they points out that the questionnaires in a study are used to obtain vital information regarding the population under study. The questionnaire questions will be designed to address to the research questions and objectives of the study. The questionnaires will be self-administered or administered to the selected sample.
The structured questionnaires using the five Likert-type-scale will be used to collect the data for this study. The questionnaires will be both dropped for filling, and picked later, or completed face to face where applicable. This is to minimize the challenge pointed out by Gillham (2000); Brown (2001) of low return rate of the questionnaire.
3.5. Piloting Testing
The researcher will conduct a pilot testing of the study tools to ensure they are clear and able to collect the intended data and information to answer the research questions and objectives. Fleiss, (1986) underscores that the study tools need to be clear and able to collect the data intended by the researcher.
3.6. Validity and reliability of research instruments
Reliability is the degree at which a research tool produces consisted results after repeated measurements conducted for the same subject in the similar condition (Gay, 1992). The researcher will conduct a pilot testing of the questionnaires using five respondents. The questionnaires will be issued with an interval of one week and the results analyzed for consistency and validity according to the Cronbach’s alpha methodology.
Richard & Schmidt (2002) emphasizes that a researcher should ensure questionnaires are, ‘Valid, reliable and unambiguous’. To ensure the reliability of this study instruments, the researcher will conduct a pretest of the study tools to test their reliability.
3.7. Data collection procedure
The researcher will first seek authorization from the Moi University where the PhD studies are being undertaken and the National Commission of Science technology and innovation for the ethical approvals.
Later the researcher will liaise with the department of youths, gender and sports in Taita Taveta County to obtain the list of the youths and youth’s groups registered in their data base and are operational. The researcher will visit the county Commissioner for introduction and creation of rapport before the onset of any data gathering. The data collected will be cleaned, coded, and keyed in statistical data package.
3.8. Data analysis method
Once the data has been collected the researcher will code the quantitative data in a statistical package and conduct both inferential and descriptive analysis. For descriptive analysis, frequencies, percentages, means and standard deviations will be used Saunders et al (2007).The inferential statistics, multiple regression analysis will be used to determine the relationship between the variables. The research findings will be presented through tabulation, bar charts and pie charts where applicable.
3.9. Ethical considerations
The researcher will be bound by the research ethics while conducting this study where both researcher and researcher ethics and researcher and study participant ethics will be paramount. The research participants will be assured of their anonymity and confidentiality to prevent them from any harm when participating in this study and thereafter. Numbers and initials are going to be used to represent the participants to ensure their identity is not reviewed. Moreover, the researcher will seek ethical approval from an accredited institution for research ethics licensing in Kenya and also he will honor other researchers by observing copyright laws.