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Strategic Responses by Microfinance Banks to the Dynamism of the Economic Environment: Capping of Interest Rates by Central Bank of Kenya

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Strategic Responses by Microfinance Banks to the Dynamism of the Economic Environment: Capping of Interest Rates by Central Bank of Kenya STRATEGIC RESPONSES BY MICROFINANCE BANKS TO THE DYNAMISM OF THE ECONOMIC ENVIRONMENT: CAPPING OF INTEREST RATES BY CENTRAL BANK OF KENYA BY WINNIE AFANDI A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI DECEMBER 2017 DECLARATION I declare that this project is my original work and has not been presented for award of any degree in any university. Signature …………………… Date…………………………… WINNIE AFANDI D61/79158/2015 Supervisor Approval This project has been submitted for examination with my approval as the university supervisor. Signature …………………… Date…………………………… PROF. ZACHARY BOLO AWINO Department of Business Administration, School of Business, University of Nairobi. ii ACKNOWLEDGEMENTS Glory to the Almighty God for His indescribable love and gift of life without which l would not achieve academic success. Much appreciation to my project supervisor, Prof. Zachary B. Awino for his commitment, guidance and availability throughout the project period. He has been patient and provided positive criticism to enrich this work. I am also grateful to my project moderator, Prof. K’Obonyo for the checks on my work. I thank all the respondents from microfinance banks for their feedback upon which success of this research has materialized. Special thanks to my house-help Millicent for her great support in taking care of my children while away from home for longer hours. Lastly, thanks to my family, friends, classmates and colleagues at work for their encouragement and psyche to pursue and finish this work. iii DEDICATION To my dear husband Collins and our children Jesse and Abigail for their love and inspiration and to my parents George and Rebecca Imbahale for the support bestowed to me in pursuit of my academic endeavors. iv TABLE OF CONTENTS DECLARATION......................................................................................................... II ACKNOWLEDGEMENTS ..................................................................................... III DEDICATION............................................................................................................IV LIST OF TABLES ................................................................................................. VIII LIST OF FIGURES ...................................................................................................IX ABBREVIATIONS AND ACRONYMS ................................................................... X ABSTRACT ................................................................................................................XI CHAPTER ONE: INTRODUCTION .................................................................... 1 1.1 Background of the study ................................................................................ 1 1.1.1 Strategic Response ................................................................................. 2 1.1.2 Dynamism of Economic Environment................................................... 3 1.1.3 Strategic Response to the Dynamic Economic Environment ................ 4 1.1.4 Interest Rate Capping ............................................................................. 5 1.1.5 Interest Rate Capping by the Central Bank of Kenya ............................ 6 1.1.6 The Banking Sector in Kenya ................................................................ 7 1.1.7 Microfinance Banks in Kenya ............................................................... 7 1.2 Research Problem .......................................................................................... 8 1.3 Research Objective ...................................................................................... 10 1.4 Value of the Study ....................................................................................... 11 CHAPTER TWO: LITERATURE REVIEW ..................................................... 12 2.1 Introduction .................................................................................................. 12 2.2 Theoretical Foundation ................................................................................ 12 2.2.1 Open Systems Theory .......................................................................... 13 2.2.2 Resource Based Theory ....................................................................... 14 v 2.2.3 Dynamic Capability Theory ................................................................. 15 2.3 Dynamism of Economic Environment......................................................... 16 2.4 Strategic Response ....................................................................................... 17 2.5 Empirical Studies and Knowledge Gaps ...................................................... 18 CHAPTER THREE: RESEARCH METHODOLOGY ..................................... 21 3.1 Introduction .................................................................................................. 21 3.2 Research Design........................................................................................... 21 3.3 Population of the Study ................................................................................ 22 3.4 Data Collection ............................................................................................ 23 3.5 Data Analysis ............................................................................................... 24 CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION ........ 25 4.1 Introduction .................................................................................................. 25 4.2 Demographic Information ............................................................................ 26 4.3 Dynamism of the Economic Environment ................................................... 27 4.3.1 Assessment of the Economic Environment ......................................... 27 4.3.2 Approach to Dynamism in Economic Environment ............................ 29 4.3.3 Influence of Economic Changes on Strategy ....................................... 31 4.3.4 Impact of Capping of Interest Rates by CBK on Performance of Microfinance Banks .............................................................................. 32 4.4 Factors influencing Strategic Responses by Microfinance Banks ............... 33 4.5 Strategic Responses by MFBs to Capping of Interest Rates ....................... 35 4.5.1. Secure Lending .................................................................................... 36 4.5.2. Innovation ............................................................................................ 37 4.6 Effectiveness of Strategic Responses by Microfinance Banks .................... 38 4.7 Discussion of Research Findings ................................................................. 40 vi CHAPTER FIVE: SUMMARY,CONCLUSION AND RECOMMENDATIONS ......................................................... 44 5.1 Introduction .................................................................................................. 44 5.2 Summary of Research Findings ................................................................... 45 5.3 Conclusion ................................................................................................... 46 5.4 Recommendations ........................................................................................ 47 5.5 Limitations of the Study............................................................................... 48 5.6 Areas for Further Studies ............................................................................. 48 REFERENCES ............................................................................................................ 50 Appendix I: Research Questionnaire ................................................................... 56 Appendix II: Letter of Introduction ....................................................................... 60 Appendix III: List of Licensed Microfinance Banks in Kenya ............................. 61 vii LIST OF TABLES Table 4. 1: Years of operation ................................................................................ 26 Table 4. 2: Extent to which Economic Changes influence Strategies by MFBs…………………………………………………………………31 Table 4. 3: Dynamic capabilities ............................................................................ 34 Table 4. 4: Effectiveness of Strategic Responses by MFBs to capping of Interest Rates by CBK ...................................................................................... 39 viii LIST OF FIGURES Figure 4. 1: Frequency at which MFBs scan Economic Environment .................... 28 Figure 4. 2: Approaches to dynamism in the Economic Environment.................... 29 Figure 4. 3: Investments and activities done by MFBs to Adapt to Changes in the Economic Environment ....................................................................... 30 Figure 4. 4: Effects of Capping of Interest Rates by CBK on Performance of Microfinance banks .............................................................................. 32 Figure 4. 5: Factors influencing Strategic Responses by MFBs ............................. 33 Figure 4. 6: Strategic Responses by Microfinance Banks to Capping of Interest Rates by CBK ................................................................................................ 36 Figure 4. 7: Secure Lending ...................................................................................
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