 SCHOOL OF BUSINESS

 ASSIGNMENT 
 GROUP B
MEMBERS  REGISTRATION NO 

LEAH IMMACULATE AKELO  D33/134877/2019 

BERRYL ADHIAMBO OWOKO  D33/135901/2019 

ADAN HASSAN ADAN  D33/139123/2020 

PURITY KINYA NJUE  D33/52053/2012 

JULIUS NJUGUNA MBIRIRI  D33/137167/2019 

 FESTUS  NZAU      D33/103233/2017

UNIT:
MICROFINANCE

CODE: DFI 452

LECTURER: PROF
J.O ADUDA
 MICROFINACETHEORYAND
CONCEPTS
• INSTITUTIONALISTSTHEORY INTRODUCTION
• WELFARISTTHEORY
• MINIMALISTTHORY
• NTERGRATEDTHEORY
• POVERTYALLEVIATIONTHEORY Microfinance is provision of a broad range of financial services such as
deposits, credits, payment services to the poor and low-income households
and their micro enterprises.

Microfinance, also called Microcredit is a type of banking service provided

to unemployed or low-income individuals or groups who otherwise would
have no other access to financial services.

The two mechanisms for the delivery of financial services to such clients are:

1 .Relationship- based banking for individual entrepreneurs and small

businesses.

2.Group- based models, where several entrepreneurs come together to apply

for loans and other services as a group.
 REASONS FOR
REGULATION
 Moral hazard
  Adverse selection
   Negative externalities 
  Effective use of public resources
   Familiarize with deposit taking
institution
 PRINCIPLES OF
REGULATION 

 Competitive neutrality
 Efficiency 
 Flexibility
 Proportionality e.g., Achieve the
best result at low-cost
  REGULATORY
APPROACHES

 Regulation by existing bank laws 

 Self-regulation
 Regulation by special law
 Issue of special law
 Credit rise
 RISK
FACED BY Liquidity Rise 
MFIs
Management rise

new industry rise

Subsidy dependence rise

Interest rate rise

⦁    The lack of institution and human capacity is the key constraint. It is a specialized field that combines banking with social goals and

THE
capacity needs to be built at all levels.

⦁    Microfinance is powerful instrument against poverty.

CONCEPT OF
⦁    Finance sustainability is necessary to reach significant numbers of poor people. Most poor people are not able to access financial services

MICROFINAN
because of lack of strong retail financial intermediaries.

⦁    Microfinance is about building permanent local financial institutions.

CE
⦁    Interest rate ceilings can damage poor people’s access to financial services. It costs much more to make many small loans than a few large
loans. Unless micro lenders can charge an interest rate that are well above average bank loan rates, they cannot cover their costs.

⦁    The government role is as an enabler, not as a direct provider of financial services. National government play an important role in the
setting a supportive policy environment that stimulates the development of financial services.

⦁    The importance of financial and outreach transparency. Accurate, standardized and comparable information on the financial and social
performance of financial institutions.
THEORI 1. Institutional theory
• Has a long history and has been popular
ES  in the discipline of economics, social
theory and political theory.
• It shares much with legitimacy theory.
• It states that institution must interact with
its surrounding social system.
• Comprised of regulative, normative,
cultural –cognitive elements that together
with associated activities and resources,
provide stability and meaning to social
life.
The element 1.Regulatory pillar – Rules, laws and the associated

of an sanctions. Society expects that institutions will live by

“rules” or else i.e., microfinance institutions have rules.

institution
2.Normative pillar – These are the norms and values that
permeates through the institution and give it its ethics. Its
individuality, its personality, expectations of proper way to
behave and perform are maintained through systems of
education and professional development.

3.Cultural-cognitive pillar – These are the “taken for

granted” ways of getting things done. An institution sites
each easily in a society when it has absorbed the society
culture and ways of doing things done.
 Isomorphism
The Dimensions of
Institutional
theory  A constraining process whereby an institution changes
to resemble other institutions facing the same
environmental conditions.

2. Decoupling

Where there is a separation from the formal institutional

(that one that reflects society expectation) and actual
practices of the organisation.
 Coercive isomorphism – Institution changes its
ISOMORPHIS practices because of pressure from dominant
stakeholders e.g., corporate regulations and the
M offices

Mimetic isomorphism – Institutions will adopt the

practices of successful institutions and therefore
come to resemble them if it leads to greater access
to resources and even some strategic advantages.

Normative isomorphism – Norm groups, will

pressure institutions to adopt what they see as
“normal” behaviour. Consider the number of
microfinances and social institutions who no longer
invest in mining companies, because of pressure
from activist groups and media.
  2. Welfarist The theory is built around the concept of
social welfare function that assigns a
theory numerical index of social welfare to every
possible situation for society.

Some argue that welfarism is an inadequate

theory of social good.

Its approach was based on performance

evaluation from the standpoint of
customers.
 The Minimalist theory of J.M. Carroll is a framework for the design of instruction,
especially training materials for computer users. 

3. Minimalist The theory suggests that:

theory
All learning tasks should be meaningful and self-contained activities 

Learners should be given realistic projects as quickly as possible 

Instruction should permit self-directed reasoning and improvising by increasing the

number of active learning activities 

Training materials and activities should provide for error recognition and recovery
and 

There should be a close linkage between the training and actual system.

The critical idea of minimalist theory is to minimize the extent to which instructional
materials obstruct learning and focus the design on activities that support learner-
directed activity and accomplishment.
 Minimalist theory is based upon studies of
people learning to use a diverse range of
computer applications including word
processing, databases, and programming.
Principles of Minimalists
Theory include:

Allow learners to start Minimize the amount of

immediately on meaningful reading and other passive
tasks.  forms of training by allowing
users to fill in the gaps
themselves 

Include error recognition and Make all learning activities

recovery activities in the self-contained and
instruction  independent of sequence
 4.Intergrated
theories
 It involves combination of two or more theories by;
 End to end – one after the other.
 Side to side – one explains one type of crime,
another explains another.

 Up and down.
 Theoretical reduction – one theory subsumed in
another.

 Theoretical synthesis – abstracting two theories

into a third theory.
 Intergrated theory of crime occurs due to a
multitude of different factors across all spectrums
of criminology, so they pull from.
 Biological
 Psychological
 Sociological theories
One Integrated theory that centres our own trying to
explain deviance and society was formed by criminologist
named Albert Eliot.
Albert Eliot combined 3 theories;

1.Social learning

2.Social bonding

3.Strain

So, by combining these 3 theories, Eliot was able to offer

an extensive explanation that it caused a delivery in our
society.
 5.Poverty
alleviation
Poverty is one of the worlds pressing social issues today.

theory
Poverty is the state of being poor, not having enough money to meet the
basic needs of life such as food, clothing and shelter.

Roots of poverty

High Cost of living

Lack of good education

Unsupporting Government

Lack of job growth

Why standards
of living differ? Difference in standards of
living between the rich and
Mismanagement of resources
and absence of enforced laws
that aim to emancipate or
poor vary from country to support people living in
country. It is dependent on poverty have been major
the country’s laws, its players in expanding the
government and general rich- poor gap. It is difficult
level of development. to climb out of the place
without a ladder.

The African continent is our

There is a saying that the
case study successful poverty
more impoverished a country
reduction strategy for
(individual) is the more
African people would be the
tightly closed is the door to
one that fits well with
reform, with the lock having
petulancies of poverty in
to be opened from the inside.
Africa.
 In addition to general causes, roots of poverty in
Africa include:

A long standing for

High fertility with
reaching extreme Over reliance on
consequential
poverty and low natural resources 
sporadic growth.
assets level.
 Poverty in Africa can be alleviated or
Poverty eliminated by:
alleviation
Strategy -Deliberate focus of resources on the
poor.

-Attention to agriculture through

public and private partnership

-Action against population growth

 Possible What are the basic determinants for absolute poverty
measurement? 
exam
questions. How do we measure the absolute poverty in terms of
microfinance? 

What are the impacts of welfarist theory on rural

households? 

How is institutionalist theory important to

entrepreneurs? 

Explain how microfinance minimizes the transaction

cost in availing microfinance to the poorest of the
poor?
 Explain how microfinance minimizes the transaction cost in availing microfinance to the poorest of the
poor?

• Group lending: MFIs often use group lending models where a group of borrowers collectively take
responsibility for repaying loans. This reduces the cost of loan processing, monitoring, and collection. 

• Simplified loan products: MFIs offer simplified loan products with fewer requirements, which reduces the time
and cost of loan processing. 

• Technology: MFIs use technology to reduce the cost of loan processing, monitoring, and collection. For
example, digital platforms can be used to reduce the need for physical documentation and enable faster  
 ANSWERS
processing. 

• Shared infrastructure: MFIs may share infrastructure and resources such as offices, staff, and equipment,
reducing the cost of operations. 

• Local knowledge and staff: MFIs employ staff who are familiar with the local context and language, reducing
the cost of training and communication. 

• Referral networks: MFIs may establish referral networks with community organizations, which can help identify
potential borrowers and reduce the cost of marketing and outreach. 
  . Institutionalism theory suggests that entrepreneurs do not operate in a
vacuum, but are instead influenced by the broader social, cultural, and
economic institutions that exist within their environment
 One of the key insights of institutional theory is that entrepreneurs

How is
must navigate a complex web of norms, rules, and regulations that are
established by various institutional actors, including governments,

institutionalist industry associations, and other stakeholders.

 At the same time, institutional theory suggests that entrepreneurs can
theory also play an active role in shaping the institutions that surround them. 

important to  For example, institutional norms and expectations may influence the
types of ventures that entrepreneurs pursue, the organizational
entrepreneurs?  structures they adopt, and the types of products and services they offer.
 Overall, institutional theory provides an important lens for
understanding the complex interplay between entrepreneurs and the
institutions that surround them. 
  Welfarist theory is a philosophical and economic framework
that emphasizes the importance of promoting the well-being of
individuals and society as a whole. In rural households, this
theory can have a significant impact on the way people live and

What are the the policies that are implemented to support them. 
 One of the main principles of welfarist theory is the idea that
impacts of everyone deserves access to basic necessities, such as food,

welfarist theory shelter, and healthcare. 

on rural  Another important aspect of welfarist theory is the belief that

individuals should have access to education and opportunities
households? to improve their standard of living. 
 Overall, the impact of welfarist theory on rural households is
likely to be positive, as it seeks to promote the well-being of
individuals and society as a whole.
 • Establish a poverty line: The first step is to establish a poverty line that
reflects the minimum level of consumption or income required to meet
basic needs. This can be done by using national poverty lines or
international poverty lines such as the World Bank's poverty lines. 

How do we
measure the • Identify clients below the poverty line: The next step is to identify clients
who are below the poverty line. This can be done by collecting
absolute information on clients' income, consumption, and household assets. 

poverty in terms • Calculate poverty rate: Once the clients below the poverty line are
of identified, the poverty rate can be calculated as the percentage of clients

microfinance?
who fall below the poverty line. 

• Monitor progress: Finally, MFIs can monitor their progress in reducing

poverty by tracking changes in the poverty rate over time. 
 Kraft's Public Policy: Kraft, Michael E & Furlong, Scott R
Public Policy: politics, analysis, and alternatives (2nd ed). CQ;
London: Eurospan [distributor], Washington, D.C, 2007.

Reference DiMaggio, Paul J. and Powell, Walter W. (1991) ‘Introduction’.

In P. J. DiMaggio and W. Powell (eds.) ‘The New
Institutionalism and Organizational Analysis’, pp. 1–38.
Chicago: University of Chicago Press.

Herath, M.W (2018), Microfinance: Theory and Practices, 1st

edition, S. Godage and Brothers (PVT) ltd 

Singh PK, Chudasama H (2020) Evaluating poverty alleviation

strategies in a developing country.

Yunus, M (1999), Banker to the Poor: Microlending and the

Battle Against World Poverty, Public Affairs