Factors Influencing Customer Retention in Microfinance Institutions in Kenya (A Case Study of Micro Africa Ltd)

Abstract

Customer retention in the banking and microfinance sector has, for long, been a difficult goal for the players to attain. In addition the recent microfinance crises, most of which occurred between 2008-2010 in several countries around the world, and the emergence of new research findings exposed gaps in previous microfinance studies. Some of these gaps include lack of empirical testing on the concepts recognized globally as playing a key role in influencing retention of customers in the service sector. The study has identified four of those concepts. The purpose of the study was to analyze the factors influencing customer retention in microfinance organizations in Kenya, using Micro Africa Ltd (MAL), a leading credit only microfinance institution in Kenya, as a case study. The main specific objectives of the study were to determine the extent to which price perception, commitment, service quality and switching barriers influence customer retention in microfinance organizations. The researcher used both descriptive and correlation research design. Out of the active borrowers of the case study organization, the researcher focused on 2,100 found in Nairobi County as the target population. This is a secondary source of data. A sample size of 210 customers spread in four branches of Nairobi County was picked using a simple random sampling method. This ensured adequate representation of the total population in the country. The main data collection instruments were structured questionnaires. The dependent variable was customer retention, while the independent variables were price perception, customer commitment, service quality and switching barriers. Data analysis was done through factor analysis using STATA, statistical software and the out presented through tables and a regression matrix. The study found that of the four independent variables, only customer commitment had a significant and positive relationship with customer retention in Micro Africa Ltd in Nairobi County. The other three had a weak but positive relationship with customer retention. In order for MAL and other related MFIs to enhance customer retention, the study recommended close attention to customer commitment by investing more into customer relationship management that can inhibit switching and increase customers‟ dependency. Also there is the need to focus on switching barrier factors such as transaction time and to open more efficient branches closer to customers, thereby making switching to other financial providers somehow unattractive. Industry wide further research on the four variables should also be explored.