The business environment is today characterized by constant and consistent changes. This means that businesses have to respond quickly to identify opportunities to stay in business. Different trends ranging from economic, technological, social to political have redefined the manner in which businesses operate. All businesses dependent on the environment for their inputs and outputs thus changes in the environment trigger changes within them.
Industries in the 21st Century are responding to customers demand by becoming more innovative. With increased turbulence in the external environment, businesses may undertake some adjustments such as product/market changes, process changes, structural changes, leadership changes, technological changes, and policy and cultural changes.
Kenya’s microfinance industry is one of the oldest and most established in Africa and can be traced back to the mid 1950s when the joint loan scheme was established to provide credit to indigenous Kenyans with small trading businesses. The scheme was highly subsidized to assist the micro-enterprises through small amounts of loans without the requirements for substantial collateral. The industry has played a significant role in filling the gaps of providing new, innovative and pro-entrepreneurship modes of financing to low-income households based on sound operating principles.
Entrepreneurship development is now widely recognised with a wide range of services and campaigns geared towards creating an enabling environment for SMEs to access critical solutions such as credit facilities and markets for their products and services. We have witnessed various collaborations as well as economic platforms geared towards providing various opportunities to entrepreneurs.
Therefore, MFIs play a critical role in creating an enabling environment for entrepreneurs to access not only credit facilities but also capacity building. With enhanced growth, many of these institutions are now diversifying to offer training and capacity building support to ensure better management of funds and skills enhancement.
Very key to success is the ability to create and grow products. There is also the need to offer convenience and efficiency through diverse banking channels such as mobile, internet and agency banking. This opens growth markets in other segments besides SMEs and the informal sector that have traditionally been less involved in formal banking services.
As we continue to embrace the growth of the sector across Kenya, there are a number of key success factors as well as vulnerabilities that will need to be continuously considered.
Sustainable growth of the SME Sector
SMEs have always been considered as the foundation for economic development in regards to employment creation as well as production of goods and services. Finance and financial related services are an important prerequisite in initiation, development and growth of enterprises. Every business, whether large, medium or small requires some level of financing in order to sustain its operations and expand. MFIs provide financial solutions necessary to meet the required business requirements.
Despite their importance, SMEs are faced with the threat of failure with statistics indicating that three out of five fail within the first few months. Challenges faced by SMEs seem to evolve from different macro and micro conditions. Among such challenges emanate from financial challenges or management limits. As a strategy towards assisting SMEs to thrive, MFIs will require to implement innovative and proactive strategies aimed at providing solutions to meet the sustainability challenges affecting SMEs.
With a rapidly growing SME sector across different industries, MFIs have a unique opportunity to pay attention to the needs of facing businesses and leverage on their ability to meet their respective financial obligations.
Geographical coverage and Reach
The ultimate goal of all poverty alleviation obligations is to improve livelihoods. The microfinance business model mainly advocates for this in two main ways i.e. the financial arrangement approach and the poverty lending approach.
These two approaches are able to supplement each other in order to improve access to financial services based on community–based groups that provide a forum for enabling interaction. These community-based groups ultimately form a basis for building local capacity to manage MFIs in a participatory manner with the hopes of inspiring similar target groups in other areas.
MFIs target groups may require both financial and non-financial contributions such as education, nutritional support as is the case of low income households and management training so as to help develop micro-enterprises beyond subsistence levels and focus on commercial growth.
As with any other growth in different sectors, there is consistent change that forces organizations to consider alternative approaches to remain relevant in the market. As opposed to larger financial institutions that have strict financial regulations, MFIs have a unique opportunity to offer flexible products and services that remain attractive to their respective target markets.
Currently, we have many upcoming SMEs with viable business ideas that require funding but are unable to access credit from commercial banks due to lack of collateral. MFIs may need to be flexible in their product offering and identify unique strategies that will encourage the growth of SMEs and have structures that monitor cash flow and loan repayments.
We must admit that technology has the power to revolutionise how the microfinance industry operates. From allowing these financial institutions to access micro-entrepreneurs in hard-to-reach areas to enabling the implementation of more robust ICT and risk assessment tools, technology represents a huge opportunity for MFIs.
From a business development perspective, technological breakthrough such as mobile money and branchless banking enables the industry to leap over phases that it would have otherwise had to go through. In addition, technology allows MFIs to acclimatize their products to the unique environments and business cycles of their clients.
The writer is the Chief Executive Officer of Gateway Success Consultancy Ltd.
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