2.2 Microfinance CreditMicrofinance institutions provides small loans and other financial services to micro-enterprisesin emerging economies. It is an effective way of enabling people to help themselves by makingan important contribution to grow their financial capacities and raise their living standards.Microfinance credit institutions provides financial services for entrepreneurs and smallbusinesses in need of access to banking and other related services. The two main mechanisms fordelivery of services to such clients are relationship-based banking for individual entrepreneursand small businesses as well as group-based models where several entrepreneurs come togetherto apply for loans and other services as a group. Micro-finance credits play a pivotal role ineconomic growth of Baringo Town. Banks and lending institutions provide the services thatallows people to save and make use of available assets and resources which further supports andstrengthens the economy of the county. In the underdeveloped communities, the role ofmicrofinance institutions is to provide credit access and financial services needed to developincome earning businesses. Within any society, microcredit financial services provide the meansfor individuals and businesses to obtain credit and manage available assets on a continuous basis.Microcredit fits best those with entrepreneurial capability and possibility.Microfinance is a self-empowerment since it enables businesses to increase their income.Nowadays, the mainstream finance industry was counting microcredit project as a source ofgrowth. Given the asymmetric information problems (pre-and post-lending), high-riskenvironments and the presence of important transaction costs, banks are usually absent in therural world in developing countries. This has observed that banks charge high interest rates and7
that they fail to serve all potential borrowers due to the high risks involved (Ahmed, Adams,Chowdhury and Bhuiya, 2000). Most microfinance programs make use of some forms of lendingschemes such as peer selection and monitoring techniques as well as regular public repaymentsand joint liability. With groups lending schemes and explicitly using joint liabilities, the sameapplies to any mechanism that employs some peer screening methods, monitoring orenforcement (Barnes, 2001). Under joint liability, individual borrowers have to form groups toapply loans and all group members are held collectively responsible for the repayment of eachother's debt. Various economic analysts have proposed various explanations for the newopportunities that this mechanism offers (Coleman, 2006).2.3 Financial performance of micro-business enterprisesFinancial performance is a subjective measure and evaluation of how well a firm can utilize itsassists from its primary mode of business to generate revenues. The term is also used as a generalmeasure of firms across the same industry or rather to compare industries or sectors aggregation.