Abstract:
Regulating microfinance activities has been an important policy concern in improving financial
inclusion and extending financial services to all. However, introducing a regulatory framework of
any kind pushes targeted institutions to change. In this case, microfinance regulatory framework
that came to effect in 2008 has created three tiers of microfinance institutions: prudentially
regulated deposit-taking institutions, credit only and unregulated informal groups. Those
undertaking deposit-taking business were required by this regulation to transform their operations
to comply with the requirements. Though many institutions wanted to be allowed to mobilise public
deposits, only three institutions had managed to obtain at least a provisional license two years after
the regulation became operational. The purpose of this research is to establish the factors affecting
this microfinance transformation process in Kenya.
Experiences around the world indicate that microfinance regulatory frameworks are dogged with a
myriad of challenges that, at times, has limited the enjoyment of benefits of regulation. These
challenges affect both the regulator and institutions being regulated. This study identifies several
important factors affecting the transformation process of microfinance institutions in Kenya. These
include the ability to meet capital requirements, restructuring existing ownership and getting new
shareholders, ability to raise funds for transformation, acquiring suitable information systems,
motivation to be regulated, governance issues and managerial inertia. These factors explain why
certain institutions have moved faster than others in the transformation process and why some
have opted to remain credit only.
