‘You may start very small but [by] the way you handle the money [and] the accountability you give to the bank, they understand that you can handle the cash,” says Jane Mugambi, an Equity Bank microcredit customer who sells petrol pumps in Nairobi.
Mugambi and her husband, who started their business by borrowing much smaller amounts, are now trusted by the bank with a loan of KES (Kenyan shillings) two-million (about R188Â 000).
Microcredit, the offering of small loans (as low as $10) to inspire entrepreneurship among those who lack collateral or a steady income as a way out of poverty, started with Grameen Bank in Bangladesh in the 1970s.
In Kenya, microfinance (offering financial services to the poor) and its main component, microcredit, may have started as a nonprofit movement to lift people out of poverty, but commercial banks have now also become players in the market.
Mary Wangari Wamae, group director of corporate strategy at Equity Bank, a commercial bank serving the majority of the microcredit customers in Kenya, says that microfinance clients are a relatively stable bet in a globally volatile economic climate. “What we have realised about the customer on the microfinance level is that they are able to develop their own way of cushioning themselves from those very difficult circumstances,” she says. “These are survival and basic-provision activities that they are engaged in — For them, it’s usually not a choice to run their business or not. They are not a corporate that can say, ‘OK, the situation is so tough now; let’s wait for next year.’ They don’t have that option.
“So, it’s self-balancing and probably also explains why Equity [Bank] has continued to do well, even through very tough economic times. — I think the model has found its place in the market and we continue to do well due to the support of our customers.” The size of the existing microfinance market in Kenya is about 3% of the population, or 1.5-million borrowers, according to the Economic Intelligence Unit of the Economist Group (EIU). But that number increases significantly if you include other microfinance products and services.
And Wangari Wamae says the Kenyan microfinance market is largely untapped. “It looks like we still have more than 35% of the Kenyan population that is bankable but not yet banked,” she says. “So, as a bank, that is our guide to say that the market is still huge.”
In addition to Equity Bank, the commercial banks K-Rep Bank, Family Bank and Co-operative Bank also operate in the microfinance market. More traditional micro-finance institutions in Kenya include Faulu Kenya, Kenya Women Finance Trust Limited, SMEP, Kadet and Jamii Bora.
In Africa, Kenya scores first in the region and fourth overall in a study of microfinance business markets in 55 countries, done by the EIU. The rating is “based on an expansion of its mobile banking network and strengthening of the regulatory framework over the past year”, say the authors of “Global Microscope on the Microfinance Business Environment 2011”.
However, Henrique Martins de Araujo, a senior investment officer in charge of sub-Saharan Africa at responsAbility, a social investment company focused on microfinance, says that, although the Kenyan microfinance market is well developed, he disputes the report’s findings that it should be seen as the number one market in the region.
“I completely disagree, for several reasons,” he says. “We have some issues in Kenya. Kenya has a good regulatory environment and countries like Uganda, Rwanda and Tanzania do mirror Kenya’s CBK [Central Bank of Kenya] regulations. The issue is more the lack of a credit bureau on the microfinance side and too many microfinance institutions in urban areas in Kenya — and the result of this is the over-indebtedness of clients,” he says.
“In large cities in Kenya, like Nairobi and Mombasa, you have an issue of over-indebtedness,” he says. “If the poor have easy access to money, they will become over-indebted so, together with microfinance, most of those institutions really need to come in with financial education as well. They need to assess whether their clients are already over-indebted before giving the loan [by] having a functioning credit bureau, which is not the case in Kenya,” De Araujo says.
Financial education
The average portfolio of a micro-finance institution in Kenya includes about 15% to 20% of loans in arrears. Globally, in most markets, that figure is generally much lower, between 2% and 5%. “Anything more than 5% and you should start getting worried.”
But, De Araujo says, Faulu Kenya is a microfinance institution that has managed to stave off this trend over the past few years.
Charity Wainaina, director of marketing at Faulu Kenya, says that providing financial education is largely what turned things around.
“The first thing that we did with our customers is customer education. We realised that most of the customers were falling into that state due to ignorance. At the point of customer recruitment, we invest a lot in training the customer, letting them know what they are getting into,” she says.
Because microfinance customers typically don’t have a salary or collateral to guarantee their loans, microfinance institutions traditionally require that a group of borrowers serve as guarantors for each other’s loans. And it’s been important to make sure that structure is solid, says Wainaina. “We get involved in the group dynamic itself and help them structure their constitutions so that they have a form of agreement as to ‘this is how we will carry out our affairs’. Once the group has put that into place, we follow up to see the cohesion of the group. That has actually resolved half of your default issues at recruitment level,” she says.
Running a viable microfinance institution can be a tricky business. Compared with a commercial bank loan, a microloan is minuscule, and the profit on each loan is small or nonexistent. But the cost to serve each loan is still high. “Microfinance institutions have had a challenge when it comes to the cost of funds,” she says. “We have had to borrow from commercial banks to lend.”
But, in 2009, Faulu made history by becoming the first microfinance institution to be licensed by the Central Bank of Kenya to accept public deposits. Faulu now uses these deposits for lending, cutting back on the cost of funding.
The microfinance customers really needed an institution to open an account that was tailored to their needs, says Wainaina. “We even had a moment when most commercial banks found it unsustainable to serve the microfinance customer. I think in about 2006, they called the micro-finance customers to come and close their accounts if they had a balance below KES5Â 000 to KES10Â 000. That was very humiliating and that gap stayed on for long. We had been watching all this, but we didn’t have the environment then to serve them.
“Then the Microfinance Act came into effect to meet some of the needs that the market had. There was the customers’ need to get a player that understood them at their level and there was also the institutions’ need to cut back on their cost of funds.”
The most deprived bear brunt of the burden
One of the ways to help the poor and disadvantaged suffering from the effects of climate change is to boost their access to finance, according to the United Nations’ 2011 Human Development Report.
The report, compiled under the auspices of the United Nations Development Programme (UNDP), maps the challenges to sustainable and equitable progress and finds that, as environmental degradation continues, already disadvantaged people overwhelmingly bear the brunt of the burden.
“In the 176 countries and territories where the United Nations Development Programme is working every day, many disadvantaged people carry a double burden of deprivation,” said UNDP administrator Helen Clark in a foreword to the report. “They are more vulnerable to the wider effects of environmental degradation because of more severe stresses and fewer coping tools. They must also deal with threats to their immediate environment from indoor air pollution, dirty water and unimproved sanitation.”
The report shows that undeveloped countries that have contributed the least to global climate change are the ones that are experiencing the greatest loss of rainfall and more erratic weather patterns, resulting in failing crops and the loss of livelihoods.
“Adverse environmental factors are expected to boost world food prices 30% to 50% in real terms in the coming decades and to increase price volatility, with harsh repercussions for poor households. The largest risks are faced by the 1.3-billion people involved in agriculture, fishing, forestry, hunting and gathering,” the report says.
Among other damaging results, global warming also threatens to make deserts out of the dry lands that are home to about a third of the world’s population. Dry lands in sub-Saharan Africa are particularly sensitive, the report says. Clark concludes that a new vision is required for promoting human development that links equity with sustainability.
“Beyond the Millennium Development Goals, the world needs a post-2015 development framework that reflects equity and sustainability,” she says.
“At local and national levels, we stress the need to bring equity to the forefront of policy and programme design and to exploit the potential multiplier effects of greater empowerment in legal and political arenas.
“At the global level, we highlight the need to devote more resources to pressing environmental threats and to boost the equity and representation of disadvantaged countries and groups in accessing finance,” the report recommends.
The 2011 Human Development Report: http://hdr.undp.org/en/media/HDR_2011_EN_
‘Hard work pays off’
Caleb Mokaya (42), who lives on the outskirts of Nairobi with his wife and two children, has taken six microfinance loans with Faulu Kenya. He got his first loan for KES (Kenyan shillings) 10Â 000 (about R940) in 2002, and has just paid off a KES100Â 000 loan.
We meet at the shop stall in Nairobi’s Kawangware where he keeps the maize mill he bought with that loan. It cost KES150Â 000, of which he paid KES100Â 000 with the loan and KES50Â 000 with savings from the proceeds of running a fruit and vegetable stall.
Mokaya, who works as a security guard at night, has employed his brother to run the mill, where he grinds the maize he tries to source at decent prices or grow at his family farm in Trans-Nzoia, near Kitale.
“If you want to do a business like this one, you have to be committed — You need to keep looking where you can buy this maize at good prices, compare prices, and assess where to start another business,” says Mokaya, who also runs a used-clothing business.
Helping farmers milk their assets sustainably
While many other microfinance institutions provide microloans to small businesses in urban areas, Juhudi Kilimo focuses on providing asset financing to smallholder farmers and agribusinesses in rural Kenya.
Juhudi Kilimo (which is Swahili for “effort in agriculture”) was founded in 2009 as a spin-off of the K-Rep Group, one of the first finance institutions in Kenya. K-Rep, in its research, had found that most microfinance institutions and banks were excluding the 75% of the Kenyan workforce who were engaged in rural agriculture, says Nat Robinson, Juhudi Kilimo’s chief executive.
“So it was this big population that was not being served by the financial institutions,” he says.
To help farmers create an immediate and sustainable income, Juhudi finances agricultural assets such as dairy cows, poultry, irrigation and small-farming equipment. And assets are insured to protect the farmers from business losses.
A dairy cow is a good example of an income-producing asset because it produces milk on a daily basis, according to Robinson. “You can use that milk to sell, and then you can use the money from the milk proceeds to service the loans,” he says. “And once the loan is done, the farmer is left with assets that will continue to generate income.
“In our case, they will take another loan and buy another cow, so they will double and triple their income after each loan whereas with most traditional microcredit, once the first loan has been used, they will often come back for the same loan and not be in any better position a year later. They are just kind of stuck in that cycle,” he says.
Agriculture makes up about 25% of Kenya’s GDP but productivity is very low. That means there is a lot of opportunity for improvement, says Robinson.
“So by providing microfinance to smallholder farmers, you can address both the poverty issue and the food-security issue by making the farmers more productive at producing their crops and their outputs from the farms,” he says.
Most of Juhudi’s customers have between a half and two-and-a-half hectares of land, and most earn below $4 a day. So even small investments will make a visible difference. For example, a high-yielding cow that produces 12 to 14 litres of milk a day (compared with the household’s normal cow, which produces two to four litres daily) provides a household with an income as well as milk for the family.
“We can see the ones who have taken three, four, five loans — They have really built up their businesses and have a kind of mini-dairy farm at that point, and are employing two to three people, and all their children are going to school,” says Robinson.
But there are many pieces that have to come together to alleviate poverty and access to finance is just one of them, he says.
To ensure the farmers’ viability and Juhudi’s own financial health, it gets involved in the whole aspect of farming — running a successful business, including farming know-how and education, access to markets and technology, as well as health and life insurance for the principal owner of the business.
This package was produced by the Mail & Guardian in partnership with the Southern Africa Trust
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