Thesis (MDF)--University of Stellenbosch, 2010. / 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.