Are we formal yet? The evolving role of informal lending mechanisms to support entrepreneurship and poverty alleviation in central Kenya

Abstract

Entrepreneurship has substantially contributed to the economic growth of Kenya. However, multitudes of the country’s poor have yet to experience the benefits of this growth due to limited access to capital. Microfinance institutions exist in central Kenya but serve the needs of only a handful of entrepreneurs that want to engage in small businesses. Consequently, many Kenyans turn to various informal lending mechanisms to pursue their entrepreneurial dreams and bolster their livelihoods. This paper examines how adults in and around the town of Nyeri, Kenya access capital from a wide variety of formal and informal sources. Several modes of borrowing are identified and reasons for choosing lenders are analysed. Collectively, this data suggests the gradual expansion and formalisation of informal lending mechanisms. This paper provides insights to entrepreneurs, lending institutions and development agencies to help develop effective business and partnership strategies that can empower enterprising individuals in impoverished communities.