The idea behind microfinance institutions was to fight against poverty and show mainstream banks the poor can be bankable clients. But in rural Kenya they are facing a viability crisis.
Rachael Wangeci walks up the steep Kiahia Hill on the slopes of Mount Kenya clutching a plastic paper-bag. Inside are documents relating to a self-help group that Wangeci co-founded six years ago.
Today, the Mwana Mwihoti (Kikuyu for 'able child') Women's Group has grown from the initial membership of eight to 20 members. How it funds itself is crucial to the group's success.
The group is one of many registered with K-REP Bank, the first micro-finance bank to set up in Kenya. When Mwana Mwihoti was founded its members pooled resources to open an account with K-Rep in order to access loans – unlike mainstream banks, K-Rep did not demand collateral as security.
Rather, K-Rep – like many other micro-finance banks – uses peer pressure mechanisms, group infrastructure and savings as security, explains Adan Juma, a K-REP field officer based in the nearby town of Karatina, some 100 km north of the capital Nairobi.
With the initial loan Mwana Mwihoti set up a small poultry project which in turn enabled it to start a revolving fund – now used to service a top-up loan of Kenyan Shillings 60,000 (about 740 dollars). But with recent changes in the Kenyan banking sector, micro-finance institutions (MFIs) such as K-Rep are facing a stiff challenge from conventional banks that are seeking out individual members from small groups such as Mwana Mwihoti to take out unsecured loans.
"The banking sector is changing fast," says Gerald Omondi, a business finance lecturer at Kenyatta University. "Although it was micro-finance institutions such as K-REP who previously attracted low-income, small and micro-entrepreneurs ignored by the mainstream banks, that situation is now changing."
Typically, MFIs lend small amounts of money to small groups composed mostly of the poor. The general idea is promote entrepreneurship but these groups – including nongovernmental organisations and cooperatives – use the loans in a variety of ways. Mwana Mwihoti helps out members facing short-term problems – whether it is to pay school fees, or to buy medicines. But, Wagenci says: "We are still facing many problems because some people require a lot of money which we cannot access."
Gruelling poverty forms the backdrop to people's financial needs in this part of Kenya – Kiahia village is dotted with coffee farms but they are unattended. Although the village is situated in a valley with volcanic red soil ideal for growing coffee, villagers stopped farming coffee in 1989 when the international market collapsed, pushing many families further into poverty.
"That's why we came up with this group – to see if we could help one another with the little we had," says Marion Ngugi, a village nursery school teacher who keeps Mwana Mwihoti's account books.
With the economic situation in rural areas showing little signs of improvement commercial banks have been quick to sense a business opportunity and are moving into MFI-territory.
"Members who have regular income from selling milk or are employed as teachers can now easily access loans without going through a group," says Ngugi. This, she says, may have deep ramifications – individual members might pursue their own business away from their groups or even pull out, leaving others vulnerable.
Omondi agrees: "For such small groups to survive they require solidarity, without which repayment declines unacceptably."
A recent study by the University of Bath in Britain has found that although MFIs originally were meant to have come up with innovative ways that could be copied by conventional financial institutions, such as banks, this has not been the case in Karatina.
"In Karatina locally operational MFIs serve a very small proportion of the market and do not seem to have had any competition or demonstration effects on other providers," says the study by Susan Johnson of the university's Centre for Development Studies.
The study, published in the Journal of International Development and titled The Impact Of Microfinance Institutions In Local Financial Markets, notes that regular financial institutions such as banks are moving towards catering to lower-income customers, but this, it says, is happening in response to "wider pressures" – particularly worsening macroeconomic conditions, characterised by increasing joblessness – rather than competition from MFIs.
Over the past year, Kenya's three major banks – Barclays, Standard Chartered and Kenya Commercial Bank – have been trying to push personal loans, rather than emulate the MFIs' group-based approach.
"The reason why MFI lending schemes are failing is because the charges are extremely high and in many groups repayments are weekly based. It is not easy to manage a loan on a weekly basis, however small the loan," says Gordon Opiyo, business editor with The Standard newspaper.
Another problem with group savings, some experts say, is that individuals may not like to forfeit their own savings on account of their peers.
In addition, says the study, "bank base interest rates have been falling and clients are aware that banks are now quoting lending rates below those offered by MFIs."
Some commercial banks are offering unsecured loans and online credit-scoring techniques to enable quick decision-making. This too is emerging as a challenge to MFIs since the targeted customers are often the same.
K-REP says it is trying to keep up with the mainstream banks and looking at alternative forms of collateral.
But major commercial banks seem to be a step ahead – they now want MFIs to be regulated by the Central Bank of Kenya. "…we are looking forward to the enactment of micro-finance legislation, which we hope will provide some minimum standards of operations for these institutions and a framework which banks could use to interface with small and medium enterprises," says a report by the Kenya Bankers Association that was handed over to Finance Minister Daudi Mwirararia in mid-2004.
The Association of Micro-Finance Institutions (AMFI), whose members include 11 large MFIs that together serve over 97,000 clients, is not happy with the proposal.
The association maintains that MFIs, who serve thousands of nongovernmental organisations, cooperatives and village banks working with the poor, should not be subject to the same rules that govern mainstream banks.
If, for instance, the Central Bank were to set the minimum working capital for all banks at a high level, many MFIs serving the poor could go under, says AMFI chairwoman Betty Sabana. That would be tragic in a country that is classed by the United Nations as one of the poorest in the world.
As Sabana points out, "Even though MFIs have evolved over the last four decades, the majority of Kenyans still have no access to financial services."
John Kamau is a Senior Writer with The Standard newspaper and writes for the New African, London.