The New Consumer Protection Bill: Will it adequately address the challenges of Kenyan microfinance borrowers?

Consumer protection has come into the spot light in Kenyan parliament with the introduction of the new Consumer Protection Bill.  If the new bill is passed, consumer advocacy organizations will have something to celebrate during the New Year.  The rights of all Kenyans will be expanded, but this bill is especially important for financial based consumer rights in Kenya.

After hearing similar consumer concerns during interviews with microfinance borrowers over the past five months, I have discovered that this bill is especially important for consumers of financial products. 

As a stranger to the Kenyan microfinance borrowers whom I have met and interviewed, I found that asking about the two Ds [debt and default] is difficult.  For many Kenyans, defaulting and becoming indebted is often like becoming an outcast in his or her community.  Borrowers always seem to know someone or heard of another borrower who defaulted.  It is never the interviewee who experiences such hardships.  While my interview questions did not directly ask about consumer concerns, I have found that interview responses discuss the lack of protection of borrowers.  

As I comb through the interviews conducted with over sixty-five borrowers, I find that some of their consumer rights and protection concerns will be addressed while others will not in the new Consumer Protection Bill.

-What the consumer protection bill protects: Summary of eight important financial based consumer rights that will protect borrowers of “closed credit.”

1.   At or before the time a borrower enters into a credit agreement, every lender must deliver to the borrower a disclosure statement of the credit agreement.

2.   Thirty days after the lender increases the annual interest rate 1% or more than the most recently disclosed rate or changes the amount of the loan payments (not the number of payments), the lender must submit a new disclosure statement to the borrower.

3.   A borrower may purchase insurance, if required, from any insurer of the borrower’s choice.

4.   A borrower may terminate optional service of continuing nature provided by the lender.

5.   If lender allows for period of loan deferral, the lender must state whether if interest will accrue.

6.   Default charges are limited to responsible charges in respect to legal costs incurred in collecting   payments and realizing or protecting security after a borrower defaults.

7.   A borrower can pay the full balance of the loan amount at any time without penalty.

8.   No lender can release or make representations of any credit agreement in any form unless complying with the prescribed requirements. Thus, providing privacy of information for borrowers. 

Despite these transformational new rights, there are seven more financial based consumer rights that need to be protected under the new bill.  These suggestions are based on the concerns and obstacles that borrowers discussed during interviews that I conducted, including concerns of transparency and not understanding their loan agreement, requirements and terms.

-Needed Improvements to the Consumer Protection Bill: Summary of seven more financial based consumer rights for borrowers of “closed credit” that NEED to be protected under the new bill.

1. Every borrower should receive a copy of his or her loan agreement before entering into an agreement.
2. Every borrower should receive a new disclosure statement containing ANY change to the loan agreement that the borrower initially signs when entering into an agreement.
3. Lenders should be required to disclose specific information in loan agreements, including all lending fees, a summary of loan repayment amounts and dates, penalties of default, insurance requirement and coverage, ect.  
4. A minimum and maximum page requirement should be established for all loan agreements to enforce plain language to make it easier for borrowers to understand loan obligations and requirements.
5. After signing a loan agreement, a cooling off period (with or without penalty) should be provided to all borrowers with the opportunity to withdrawal from their agreement. (Currently, consumer protection bill only provides such protection to consumers who want to cancel a personal development services agreement).
6. All lenders should be required to provide debt counseling and financial education for borrowers.
7. Most importantly, a consumer protection agency needs to be established under the Consumer Protection Bill 2011 that provides financial resources, protection and education for consumers.

With the expansion of further financial based consumer rights in the new Consumer Protection Bill, consumers will not only be able to make educated financial decisions, but they will be provided with legal protection paving the way for any Kenya to have a long and healthy financial future.

I Cannot Respect My Relationship Unless the Man Makes More Money than Me: Societal Contributions to Gender Inequalities

"I cannot respect my relationship unless the man makes more money than me" was the response of a female radio host in Nairobi discussing recent research that found college educated females in the United Kingdom earn more income than their college educated male counterpart in the same occupation. The male host suggested that there should be a legislation restricting a wife from earning more income than her husband. 

A few weeks ago, another radio host asked listeners to discuss whether or not they have helped their ex-partners. He stated that women are “hateful toward their exes” and that the women President Obama once dated probably call Michelle Obama a “bitch” because they are jealous.

Last week, two radio hosts discussed the recent appointment of the new Pakistani ambassador to the United States. The female radio host questioned why a woman was chosen for the job because, as she explained, women are “push overs.” 

Over the course of four months, I have heard such gender based discussions on various Kenyan morning and evening radio programs. Such radio programs lead me to question how societal norms negatively impact the progression of gender equality in Kenya.

Kenya is not the only country that has to challenge social obstacles to strengthen gender equality for its citizens. In the United States, despite the increase to paid employment and access to education for women, women still perform that majority of house work in their families.  This trend was labeled the “double shift” by researcher Arlie Hochschild [1] to illustrate the unequal distribution of labor between men and women of the same household. 

How does anyone make sense of the international progress promoting gender equality while social norms and traditions of varies societies enforce unequal lives between men and women around the world?

In the article entitled “Why is progress in gender equality so slow? An Introduction to the ‘Social Institutions and Gender’ Index,” authors Denis Drechsler and Johannes Jutting [2] analyze how social institutions [3] impact gender equality despite wide spread economic growth and expansion of employment opportunities around the world.  

The authors argue that a “multilayered approach” is needed to address the root causes of attitudes and beliefs in a society. One layer of this approach is to promote and create a long lasting sustainable change in social attitudes through media channels and informational campaigns “…to win the support of the entire population, including men” (Drechsler and Jutting 82).  

As a student who once researched gender inequalities in Kenya, I argue that such a suggestion would be effective in Kenya. Despite international laws and treaties, the first The United Nations Third World Conference on Women held in Nairobi, the proliferation of Kenyan microfinance and the recent death of Kenyan activist and academic Wangari Maathai (a celebrated Kenyan who defied many gender roles of the past and present), many societal norms and traditions still negatively impact the progression of gender equality in Kenya.

Radio has the potential to influence the thousands of listeners who tune into the radio every day at home, work or on the road.  Radio can spark debates and responses from listeners suggesting this medium has the potential to influence stereotypes and perceptions of gender, but also increase dialogue that can lead society to question common societal beliefs and attitudes.

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[1] Hochschild, Arlie R, and Anne Machung. The Second Shift. New York: Penguin Books, 2003.  

[2] Article taken from Chant, Sylvia H [editor]. The International Handbook of Gender and Poverty: Concepts, Research, Policy. Cheltenham, UK: Edward Elgar, 2010. 

[3] Social institutions are defined as “…long lasting codes of conduct, norms, traditions, and informal family laws that do not change over time” (Drechsler and Jutting 78).

A Consumer Education Manual Outline is Born

As I will soon begin to assemble the consumer education manual, I have begun to meet with organizations dedicated to consumer education in Kenya to discuss what should and should not be included in the content. The goal of the manual is to create an easily understand and accessible education tool to contribute to the transparency of the microfinance industry, prevent predatory lending and reduce ill-informed financial decisions among the most vulnerable populations in Kenya.

At these meetings, I share with consumer organizations my ideas for the manual and then I ask for suggestions to improve the content in order to serve consumers with a practical and effective tool. Such collaboration is  an important preparation for the manual as consumer organizations will be one of the primary users in efforts to educate Kenyan consumers through trainings, workshops or education initiatives.

The representatives from organizations interested in using the manual in their programs include Consumers Unity and Trust Society, MicroJustice4All, Consumers Federation of Kenya and the National Coalition for Informal Sector Society.  I would like to thank each of these organizations for showing interest in my work and helping to improve upon it.

Through meetings with such organizations, I have created an updated outline for the upcoming manual. 

Outline for the Upcoming Consumer Financial Education Manual:

 

-LOAN PRODUCTS: A list and description of the loan procedures, terms and requirements of microfinance programs in Kenya. Business loan products of Faulu Kenya Limited, Jamii Bora Bank, K-Rep Bank, Kenyan Women Finance Trust Limited, Opportunity Kenya, Rafiki Limited and Women Enterprise Fund will be featured to create transparency for borrowers often unsure of the terms of their lenders. Sample of loan contracts from several of these institutions will be included in the manual as well.

-RESOURCES: Resources that can assist microfinance clients with addressing their questions and grievances, specifically the regulation authorities in Kenya, legal aid clinics and consumer advocacy organizations.

-QUESTIONS: Questions that all borrowers should ask their lenders before applying for a loan.

-TERMS: Glossary of terminology used by the microfinance industry, specifically language used in loan agreements.

-RIGHTS: Summary of consumer rights in Kenya and legislation regulating activities of the Kenyan microfinance industry.


-CONSEQUENCES OF DEFAULT: Summary of the consequences that result if a borrower defaults, including the legal requirements for the repossession and auctioning of chattel (securities). 


-EXPERIENCES: Over sixty microfinance borrowers have been interviewed to understand what information should be included in the manual, including what borrowers do and do not understand about their participation in microfinance. This will allow current borrowers the opportunity to contribute to the content and structure of the manual along with the education of their peers.

If a reader of this blog post has any suggestions for the manual, please feel free to contract me at hermanl [at] berkeley [dot] edu

More information about the Mbao Pension Plan for Jua Kali Workers

As I mentioned in my previous blog post, I conducted an interview with the CEO of the Mbao Pension Plan. This is the new individual retirement plan that is trying to change how Kenyan jua kali (informal economy) workers plan and save for the future. This new program registered by both the Kenya Revenue Authority and the Retirement Benefits Authority aims to create individual retirement saving plans for workers who do not have retirement pensions.

Below is additional information that I learned from the interview for those interested in learning about this affordable, flexible and convenient retirement plan. Such a plan is one example of how different types of financial services in Kenya are becoming "micro." Microfinance in Kenya is continually transforming.

-What are all of the requirements for a member to withdrawal from the program? The member must notify the head office with a letter of request to withdrawal from the program.

-Is there a penalty fee for early withdrawal? There is a fee, but it is minimal. I was unable to learn the exact figure.

-Are taxes paid after withdrawal? No.

-Is there an age requirement for membership and withdrawal? Any Kenyan older than 18 years.

-How much interest is earned? At least 7%.

-Are penalties charged for no contribution of the required amount each month?  No.

-Can a member withdraw their contributions in one sum? There are two options. First, a member can receive the total sum of their contributions. Second, a member can receive half of their contributions then schedule monthly disbursements.

-What is the time period it takes for a member to receive his or her contributions when exiting from the plan? Two weeks.

-How do members receive their contributions? Contributions are issued through a check that can be picked from a chapter office. In the future, contributions will be disbursed through M-PESA or AIRTEL.

-How do members receive their yearly statement documenting their contributions? The complimentary yearly statement is delivered to the member’s phone.

-Is training provided to members of the plan? Training is not currently provided, but in the future members will have access to training.

Information about the plan and membership plan application forms can be found at: http://www.rba.go.ke/component/content/article/81

Mbao Pension Plan: How can millions of Kenyan jua kali, informal economy, workers save for retirement?

How are millions of Kenyan jua kali, informal economy, workers not saving for retirement?  I argue that most of these workers are not planning in any way for the day that they can no longer work.

Jua kali workers are employed by small businesses or employ themselves in small scale income generating activities. Such work results in small scale, irregular sources of income that often make it difficult to plan for the future, specifically retirement.  Most workers are trying to surviving today, thus planning for the future is often a luxury.

So, what can be done about it? 

A new individual retirement plan called the Blue MSMEs Jua Kali Individual Retirement Benefits Scheme, otherwise known as the "Mbao Pension Plan," is trying to change how such workers plan and save for the future. This new program registered by both the Kenya Revenue Authority and the Retirement Benefits Authority aims to create affordable, flexible and convenient individual retirement saving plans for workers who do not have retirement pensions. 

The Mbao Pension Plan is just one example of how different types of financial services in Kenya are become "micro." Microfinance in Kenya is continually transforming.

Members contribute at least 20 Kshs (about $0.20) per day, equaling 100 Kshs (about $1.00) per week  or 500 Kshs (about $5.00) per month. Such a sum is already saved daily by members of merry-go-round groups whom I have met in Nairobi slums and rural communities. The membership and activation fee for the plan is 100 Kshs. No other fees are charged for individuals who remain a member for one year before withdrawing from the scheme. 

Daily deposits are sent by individual members through M-PESA or AIRTEL MONEY (two mobile phone money transfer services) illuminating daily or weekly trips to the bank. I think this is the most important aspect of the program as most rural and urban informal workers own a mobile phone. Members can also track their contributions to their plan through a free statement that each receive once a year.

As someone currently researching financial services offered to Kenyan low income individuals, I argue that this plan has the potential to be a great tool, especially as the Kenyan unemployment rate and the cost of living in Kenya is rising. According to the Central Bank of Kenya, the inflation rate in Kenya is 18.91% as of October 2011. The annual average inflation for October 2011 was 11.49% suggesting that inflation has risen over the year. [1]

As of now, there are unanswered questions that anyone planning for retirement should ask of their plan. These questions include:  What are all of the requirements for withdrawal? Is there an early withdrawal penalty? Are taxes paid after withdrawal? Is there an age requirement for membership and withdrawal? How much interest is earned? Are penalties charged for no contribution of the required amount each month? I will post this information in the future for clarification. 

Information about the plan can be found at:   
http://www.rba.go.ke/component/content/article/81

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[1] Central Bank of Kenya. <http://www.centralbank.go.ke/>.
The annual inflation rate is the change in the CPI in the current month relative to the index for the same month in the previous year.

Loan Calculator for Microfinance Borrowers

As I began researching microfinance in Nairobi a months ago, I visited a dozen websites of Kenyan microfinance providers. Some of these lenders provide a detailed description of their loan products and lending terms, but rarely are loan contracts provided for public or client viewing. 

Fortunately, I stumbled upon a unique tool on the website of U & I Microfinance Ltd that I think will help current and future microfinance borrowers. This microfinance lenders provide a loan calculator [1] on its website for clients to estimate loan costs. 

On the website of U & I Microfinance Ltd, consumers will find a loan calculator that can be used to calculate their principle loan amount, interest rate and repayment period to learn an estimated total of the amount owed and monthly repayment amounts. I urge those interested in a microfinance loan to calculate the costs of borrowing before applying for a loan and/or signing a loan agreement.

You can find this tool at the following website:

http://www.uni-microfinance.co.ke/Loancalculator.html

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[1] Please note that the calculator only provides an "indicative value" that may not be exact.  

From Gender Inequalities to Band-Aid Solutions: The “Ten Commandments” for the Kenyan Microfinance Industry

In my previous blog post, I discussed the various gender inequalities that the Kenyan women with whom I worked and collaborated in the past often experience and how societal norms can impact their participation in microfinance. While I recognize that microfinance programs cannot change the gender norms of a society, staff members of microfinance programs can help to mitigate the risk that such inequalities bring upon the lives of women through the following ten suggestions that are assembled based on my own research of the Kenyan microfinance industry along with the recommendations of the Fairkampaign [1] and the SMART Campaign [2]. I argue that these suggestions can be called the “ten commandments” of Kenyan microfinance.

First, Kenyan microfinance programs should allow borrowers the opportunity to deferrer their loan or receive debt counseling in case of a financial emergency. None of the Kenyan microfinance programs that I am researching allow for this option. Grace periods should be offered for all loans according to the use of the loan.

Reason: Many Kenyan microfinance borrowers whom I interview discuss the fear that the price of living will continue to rise and their businesses will not earn enough profit to repay their loan. Also, many borrowers discussed the hardship of paying the loans of defaulters in their group that increases the financial debt of the other group members. Measures discussed above can prevent the default of the borrower.

Second, the staff of Kenyan microfinance programs should schedule training and mandatory meetings in consultation with its participants to make educational opportunities and program obligations easily met.

Reason: Many of the microfinance borrowers whom I interview discuss long working days with many responsibilities of work, family, church and community. Many explained that the mandatory weekly group meetings required by their microfinance program often take a whole day as borrowers often have to travel long distances and close their businesses to attend.

Third, Kenyan microfinance loan applications, contracts and other materials used by Kenyan microfinance programs should be offered in more than one language if more than one language is spoken by the population that the microfinance program serves.  Also, loan applications and contracts should be written in plain, simple language, and read and explained verbally to all borrowers and their co-guarantors. 

Reason: First, the Kenyan microfinance loan contracts that I have reviewed are written in technical, legal language that is not understandable to a person without an education or legal background.  Second, all of the Kenyan microfinance programs that I am researching only offer loan contracts in English, but many borrowers whom I interview speak only Swahili. When given the choice, some of the borrowers whom I interviewed chose an interview consent form written in Swahili rather than English. The choice should be left to the client.

Fourth, borrowers should receive copies of their loan contract before signing and a printed repayment schedule to ensure that the borrower can or a family member can help to review loan obligations and responsibilities at any time.

Reason: All of the Kenyan microfinance programs that I am researching do not release loan contracts to borrowers and rarely do such programs offer their borrowers a printed version of their loan repayment schedule.

Fifth, the total sum of the loan and all loan fees should be clearly itemized and explained on Kenyan microfinance loan contracts. Kenyan microfinance loan applications should also state what fees are refundable, if the application is denied or if the borrower decides not to sign the loan contract.

Reason: When I ask borrowers about the fees and interest rates of their loans, most borrowers cannot remember or do not understand the loan fees that are charged by their microfinance program.

Sixth, Kenyan loan contracts should state and explain the insurance policy of the loan, including whether the policy covers the death of the borrower, their spouse and their children, the disability of the borrower, along with fire, natural disaster and political violence affecting the business or home of the borrower. 

Reason: The Kenyan microfinance programs that I research have different insurance policies with different coverage. Some contracts only cover the death or permanent disability of the borrower. Other contracts cover political violence, fire and natural disaster.

Seventh, Kenyan loan contracts should clearly state the penalties for default, late loan payments and early loan payments. This includes monetary penalties, a time line of when and if the defaulter is reported to a credit reference bureau/organization, when savings can be confiscated by the microfinance program to pay arrears, and the procedures that the microfinance staff or group members can take to legally repossess the pledge security. 

Reason: The Kenyan microfinance contracts that I have reviewed do not clearly articulate the penalties for default, late loan payments and early loan payments. Also, the Kenyan microfinance borrowers whom I interview are often unclear about the repossession process and their legal rights to challenge.

Eighth, all Kenyan microfinance borrowers should be given a widow of time after signing their contract and receiving their loan to withdrawal from the loan contract. This option should be explained in all microfinance loan contracts.

Reason: Only one Kenyan microfinance program that I have researched allows for a borrower to withdrawal from their loan contract prior to receiving their loan and there is a monetary penalty fee.

Ninth, microfinance borrowers and clients should also be given the right to and explained by staff members how to communicate grievances anonymously. A “complaints resolution process” should be stated in the contract and explained verbally to borrowers and clients [3].

Reason: Many Kenyan microfinance programs have suggestion boxes in their branches, but according to interviews that I conduct with borrowers, clients rarely use them and many think that such a mechanism is ineffective.

Tenth, collateral (or securities) required for all microfinance loans should be determined only by the risk of the borrower with the suggested ratio of 1:1.

Reason: Kenyan microfinance programs often require borrowers to save two to three times their loan amount along with physical collateral (business or household items called chattel) that is equal to or more than the principle loan amount plus interest. Many of the borrowers whom I interview state that the fees and the security requirements for microfinance loans are often difficult to obtain, but they believe that accessing loans from commercial banks is even more difficult.

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[1] The Fairkampaign is a Microjustice4All initiative. The Fairkampaign’s “Characteristics of Fair Contracting” can be found at http://www.fairkampaign.org/index.php?option=com_content&view=article&id=8&Itemid=8

[2] The SMART Campaign is a “global effort to unite microfinance leaders around a common goal: to keep clients as the driving force of the industry.” The SMART Campaign’s “Client Protection Principles” can be found at http://www.smartcampaign.org/about-the-campaign/smart-microfinance-and-the-client-protection-principles

[3] A “complaints resolution process” is the intellectual idea of the Fairkampaign.

Gender Inequalities As Depowering and Destabilizing Factors that Microfinance Providers and Lenders Don’t Consider

Through interviewing women borrowers, working in their businesses and homes along with analyzing my own experiences in several Kenyan communities served by microfinance, I became aware of how gender inequalities that women participants experience in their daily lives negatively impact their participation in microfinance.  My research contributes to the understanding of such descriptions and experiences of women that are often left out of microcredit program assessments.  Several of my thesis topics as an undergraduate are provided below. 

Gender Inequalities Impact on Microfinance Participation

-How does the unequal distribution of labor in rural households impact the ability of women to pay back their loan, and attend trainings and meetings required by the microcredit program? 

 

Women work extremely long hours due to their various responsibilities inside and outside the home. Daily activities that are common among the both urban and rural women include housework, such as cleaning and cooking, farming, children rearing, church and community based functions, and operating a business or more than one income generating activity. Most homestead responsibilities are on the shoulders of women. In the United States, researcher Arlie Hochschild called this phenomenon the “second shift” to allude to the fact that even though more American women than ever hold a paying job outside the home, women still perform the majority of non-paid household based work resulting in more working hours compared to men.[1]

As a result, the mobility of women is often limited due to their busy schedules and vast responsibilities that make it difficult for microcredit participants to tend to their obligations in the program. Common requirements of Kenyan microcredit programs include weekly meetings, weekly or monthly savings, weekly or monthly loan payment schedules and training. 

 

-How does the lack of education of rural women impact their understanding and utilization of training modules, loan agreements, and their loans? 

Compared to men, women have less access to educational opportunities including vocational training and formally schooling. Even though many of the women whom I interviewed are fortunate to learn their form of trade (business) from the female members of their family and community, most are illiterate and lack formal education or training. Such factors limit the ability of women to operate a well organized and functioning business, to understand written training materials and the complexity of loan contracts.

For example, the majority of Kenyan microfinance loan contracts are on average four pages that often include legal and technical jargon rather than plain language that may affect the ability of women to know their rights and hold the program accountable including grace periods, payment terms, collateral requirements and repossession processes.  

-How does the lack of land ownership and ability to control the use of land among rural women shape their ability to repay their loans? 

 

Less than one percent of Kenyan women possess a land title deed.[2] Such a gender inequality is a reality that affects many microcredit participants who operate their business in their home and on their homestead. Thus, the businesses of rural women are often vulnerable to the control of others, particularly male family members. Thus, their ability to utilize and repay a loan is not under their direct control. 

Amy, a borrower whom I interviewed, operated a small restaurant on the side of her homestead for traveling workers, but several months after taking a loan to improve her operations a male relative who owned the land took over the business. Even though Amy had no capital in invest in a new business, she had no choice but to start raising chickens to continue to repay her loan. 

Limits of Female Empowerment through Financial Services

Months of research in the Kenyan microfinance industry has lead me to argue that gender inequalities, even though impact the participation of women in microfinance and is an essential topic when addressing the empowerment of women, are rarely addressed by microfinance providers and lenders. Many microfinance programs claim to “empower” their clients by granting access to financial services to support a business and earn income.[3] Researcher and development practitioner Gerd Johnsson-Latham argues that “[p]overty strategies often disregard the fact that women as a group face non-economic barriers in terms of social constructs (laws, norms, attitudes) which limit their access to land, inheritance, education, employment, carriers mobility and personal freedom” (43).[4] Unfortunately as explained above, there are other barriers to “empowerment” that women face on a daily basis that microfinance does not consider.

Another form of female empowerment supported by the international development and donor community is education. One of the Millennium Development Goals aims to promote gender equality and empower women through eliminating gender disparity in all levels of education no later than 2015.[5] Even though access to education is extremely important factor in raising the life chances of females, an education provides no guarantee that women will end up with better off without equal access to the job market. Research has found that even as girls begin to attend school at the same rate as boys, females are still less likely to gain access to a well paying employment or decision making positions that affect policy or resource allocation.[6] [7]  

 

I make the same argument regarding microfinance. Even if women gain access to microfinance services to start and support a business, she has many gender based barriers to overcome until she is “empowered” by access to financial services. Again Johnsson-Latham argues that “remedies,” one of which I would argue is microfinance, “…are designed to lift women closer to the level of men by reducing gaps in terms of education and income and so on” rather than challenge “male privilege” (42).[8]

A Look Ahead

As a poverty alleviating intervention, does microfinance have a role in mitigating the impact that gender inequalities have on their women participants? As gender inequalities can impact the repayment of loans and savings deposits of clients, I argue that microfinance providers should take interest. This question is important to contemplate as the success and sustainability of this poverty alleviating tool is directly impacted by socially constructed gender norms. I will continue the conversation in my next blog post through the discussing how microfinance programs can possibly reduce the negative impacts that gender inequalities have on the participation of women. 

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[1] Hochschild, Arlie R, and Anne Machung. The Second Shift. New York: Penguin Books, 2003.

[2]  Ellis, Amanda. Gender and Economic Growth in Kenya: Unleashing the Power of Women. Washington, DC: World Bank, 2007.

[3] The mission of Kenyan Women Finance Trust is “to partner with women in their creation of wealth.” The mission of Faulu Kenya is “to listen and empower Kenyans by providing relevant financial solutions.” The mission of Opportunity Kenya is “to empower the economically active poor through financial and related services, which attract and retain a growing client base.” The mission of Jamii Bora is “to assist our members to get out of poverty and build a better life for their families.” [Such information can be found on the websites of each organization.]

[4] Ibid.

[5] United Nations. Millennium Development Goals. “Goal #3: Promote Gender Equality and Empower Women.” <http://www.un.org/millenniumgoals/gender.shtml>.

[6] Ibid.

[7] Johnsson-Latham, Gerd. “Power, Privilege, and Gender as Reflected in Poverty Analysis and Development Goals” in Chant, Sylvia H [editor]. The International Handbook of Gender and Poverty: Concepts, Research, Policy. Cheltenham, UK: Edward Elgar, 2010.

[8] Ibid.

The Expansion of Collateral in Microfinance

-Expansion of Collateral in Microfinance: Definition of chattels and its purpose.

While researching the loan procedures and requirements of the Kenyan microfinance industry, I discovered that the use and definition of collateral has expanded in most Kenyan microcredit programs. Currently, savings, co-guarantee of other borrowers, and chattels are collateral requirements for a Kenyan borrower to secure their microcredit loan. Chattel is defined as tangible, movable property. Chattels can range from a sewing machine, vehicle, machinery, furniture or household items. Some microfinance programs also allow the use of crops and live stock as chattels to secure a loan.

Currently, 27% of Kenyan financial institutions accept chattels as a form of collateral for a loan. In 2010-2011, an estimated 28,000 chattel documents were registered with the Kenyan chattels registry. The microfinance institutions, for profit microfinance providers, non-profit organizations and commercial banks that I have researched in Kenya require every borrowers to pledge chattels as part of their loan collateral.

-Why expand collateral in microfinance?

The justification for the expansion of the collateral requirements of the microfinance industry is to continue to expand its services to low income clientele who do not have access to traditional forms of collateral such as a property title deed. The borrowers of the microfinance industry are unique compared to the rest of the financial sector, thus they require untraditional loan requirements. The majority of loans are characterized as short term, high cost, and high risk that are used to invest in micro, small and medium sized enterprises. Thus, in theory the use of chattels is supposed to reduce the risk of lending since only a small percentage of Kenyans, to be more specific less than 1% of Kenyan women, can secure a loan with a title deed. By using chattels, the microfinance industry can capture a large percentage of Kenyans who are excluded from borrowing based on traditionally collateral security requirements.

-The challenges of chattels mortgage according to lenders.

While attending the Chattels Mortgage Registry Sensitization Workshop hosted by the Department of the Registrar-General, I learned that there are several challenges regarding the use of chattels mortgages to secure a loan. Even though the use of chattels are meant to decrease the risk of lending, the process of registering chattels items and creating a chattel mortgage transfer has its challenges, thus leaving many institutions frustrated with its use.

In fact, a representative from Faulu Kenya, one of the largest deposit taking microfinance institutions in Kenya, stated that due to difficult and time consuming process of chattels registration and creation of a chattels mortgage, the institution halted the use of chattels to secure loans smaller than 20,000 Ksh. According to lenders at the conference, many are upset that the process of chattels registration and transfer is manual making it difficult to conduct searches to determine whether a borrower is using the same chattel to secure loans in more than one institution. Also, as chattels are a form of collateral that is movable, there is the risk that during the period of a loan the chattels may be damaged or never recovered in case of default. For these reasons, lenders still label microcredit loans as a form high risk lending.

-Repossession: The Ignored Component of Chattels Mortgage.

At the conference, reforms were discussed including the need to computerize the chattels registry and increase fees. One possible reform that was ignored is the need for clarification and enforcement of the repossession process of chattels. At the conference, I argued that the importance of enforcement guidelines and regulation is just as important as the registration process. Why discuss the legal requirements to register chattel and create a chattels mortgage without clarifying how such collateral can be repossessed? There needs to be legal reform and clarification of the Chattels Transfer Act regarding enforcement guidance of chattel repossession. 

Over the last few months of research, many microfinance programs reported vague and often illegal repossession practices according to the Chattels Transfer Act. The timely and difficult registration process often leads many institutions to ignore legal requirements set in place for the use of chattels in lending. Even though chattels are often not registered or a chattels mortgage instrument is not created, a process that lenders in the microfinance industry undertake themselves to create legal means of repossession in case of default, lenders often attempt to undertake repossession. I argue that the department of registrar needs to ensure that borrowers are aware of the legal requirements of registration and repossession, specifically their legal rights as borrowers, by clarifying and enforcing the repossession process of chattels.

At the conference, many lenders proposed a similar initiative stating that their borrowers lacked awareness making it difficult to repossess items pledged as collateral. Borrowers often seek police intervention when a lender hires an auctioneer to repossess chattels in times of default. Thus, lenders also called for the registrar office to increase efforts for the sensitization of borrowers in the use of chattels as collateral. I applaud this notion for the purposes of ensuring that clients are able to hold their lenders responsible for following legal repossession tactics.

A Glimpse into Informal Finance: Self-Help Group Savings and Lending

In September, I had the opportunity to attend a meeting of a rural based self-help group in the Rift Valley through the assistance of the Chelma Advisory Institute, a grassroots non-governmental organization. This particular self-help group consists of twelve women who first joined together during their participation in Chelma’s microcredit program. 

This was my third trip to the rural communities of Nakuru. I first worked with the women of this group as a SHARE Institute international intern in the summer of 2010 to help create a microcredit pilot program. Even though their loan period ended in June 2011, the group continues to meet at the home of a different member each month to expand upon and continue their group activities. A few examples of the businesses and activities that the collaboration helped to create or improve include poultry, tailoring, basket weaving and the production of soap to sell door to door in their village. 

I was honored to be welcomed again into their community to learn about their merry-go-round savings program that the group organized to sustain their group activities and to give members the opportunity to gain access to small scale loans. Due to the remote location of the group and the lack of household or business items (that are required security by most Kenyan microfinance programs) owned by the members, the majority of the group does not participate in the Kenyan microfinance industry other than the Chelma Advisory Institute. 

Since February, each member has contributed an estimated 1,300 Ksh to the group for loans and group activities. A total of 17,100 Ksh has revolved, meaning the group members have been able to borrower from a sum of 17,100 Ksh. The loan size is much smaller than most microcredit programs ranging from as low as 500 Ksh to 3,000 Ksh. The loan duration is one month and the interest is 5% flat rate paid when the loan is disbursed to the member. 

This is a form of informal finance has existed across the world, especially as low income individuals have traditionally been excluded from formal finance. Even now as the Kenyan government and the financial sector is attempting to increase financial inclusion of low income women, many Kenyan are opting to continue to save and lend within their own community groups. Such individuals do sacrifice the opportunity of receiving continual training and borrowing larger amounts of capital available within the microfinance industry, but the groups who do operate their own lending programs do benefit from their increased decision making power regarding loan requirements and terms.                                                        

For many rural communities, most microfinance programs are often located in urban areas or establish requirements, including interest rates, fees and payment terms, in which many women and men are not capable of servicing. For many reasons described above, this particular self-help group has decided to become their own form of development on their terms in order to save together and lend to one another to continue to grow their businesses, educate their children, and support their group activities. 

 

Informal Finance: Group Based Savings and Lending Summary

Monthly Group Savings: Amount: -Every month, each member contributes 100 Ksh. Details: -Amount collected is contributed for group based loans offered to every member.

Monthly Group Contributions: Amount: -Every month, each member contributes 60 Ksh.  Details: -First, 20 Ksh is contributed by each member for the purchase of 12 tea cups for each member. -Second, 35 Ksh is contributed for meals at the meeting. -Third, 5 Ksh is contributed by each member to purchase mobile time that is used to communicate with the NGO personnel regarding training or loans.  Method:   -First, for the purchase of the cups, a lottery is drawn once per month. One member per month takes the money (240 Ksh) to purchase cups. This ensures that the every member is able to host a monthly group meeting in which each member is able to drink a cup of tea. Is also contributes toward the domestic needs of each woman and their families.  -Second, for the purchase of the meals, one member takes the sum (420 Ksh) to purchase food for the following meeting.   -Third, for the mobile time, the secretary of the group uses the sum (60 Ksh) to organize training or contact the NGO. This person is elected by the group.

Monthly Group Based Loans: Amounts available each month: -500 to 3,000 Ksh Details:   -First, loan duration is one month.   -Second, interest for each loan is 5% of the loan amount. Interest is paid when the loan is issued. -Third, if a member cannot pay, the member is loaned the amount needed to pay off the current loan. Method: -All money collected at each meeting must be re-lent to the group members.

Perspectives from the Top: A Discussion of Contracts, Collateral and Client Over Indebtedness within the Kenyan Microfinance Industry

On Friday, September 18^th, I attended a conference held by MicroJustice4All, an organization that provides legal aid assistance to low income populations throughout the developing world. At the conference, the FairKampaign in Kenya was launched to establish collaborative relationships with microfinance institutions to create fair contracts for clients.

Different stake holders from the Kenyan microfinance industry, including microfinance investors, microfinance institutions, wholesale microfinance companies, local and international lawyers, and researchers were invited to discuss the possibility of contract reform along with the issue of over indebtedness of microfinance clients. 

At the conference, the FairKampaign in collaboration with the Clifford Chance law firm offered to review contracts of microfinance institutions on a pro-bono basis. As discussed during the conference, most microfinance institutions started as non-governmental organizations or trusts, but some have not reviewed or redrafted their contracts even though their internal structures, operations and clientele have changed over time. This includes commercial banks that still provide microfinance services, including Equity Bank that was once a building society, K-Rep that was once an NGO, and Co-Operative Bank that was once a co-operative society. 

The microfinance institutions present at the conference discussed their views of the suggested contract changes. 

First, microfinance institutions argued that training is provided in which clients learn about the loan fees, contract conditions, group requirements and default mechanisms to ensure that all clients are well prepared to take on a loan.

Of the five microfinance programs that have I researched, all provide training. Within each program, the material taught and time required varies. Rafiki DTM Limited requires 4 hours of training, Opportunity Kenya requires 6 hours of training, K-Rep Bank requires 6-10 hours of training, Jamii Bora Bank requires training with non-specified time requirement and Faulu Kenya DTM Limited requires a few hours a day for 3 days of training. It is assumed through this training that clients will have full knowledge and understanding of the requirements, the risks and the investment involved. 

Second, even though the majority of microfinance contracts are in English, many microfinance institutions claimed that verbal translation from English to Swahili is provided to every client. Unfortunately, contracts or a summary of loan requirements, guidelines and fees are never provided to clients. The institutions also failed to address the suggestion of redrafting their contracts into “plain language” and omitting technical microfinance jargon.   

Third, in regard to over indebtedness of microfinance clients, microfinance institutions claimed that institutions face a higher risk when lending compared to microcredit borrowers. Their argument was based on the fact that collateral of microcredit loans are rarely sufficient to cover the loan total when default occurs as many microfinance clients borrow from one than one institution using the same collateral to cover multiple loans and over value their collateral items. 

The argument was also made that managing microcredit loans is costly and stressful for most staff members who are required to attend group meetings, manage group behavior and loan payments, conduct training, process loans, and evaluate individual borrowers and applications. Often, staff members cannot manage all of the responsibilities described above to the best of his or her ability. 

Despite the limited participation of Kenyan microfinance institutions at the conference, I hope that microfinance institutions take advantage of the FairKampaign and come forward voluntarily to have their contracts reviewed. After all, suggestions made by the FairKampaign are voluntary. Such participation has the potential to increase the credibility among microfinance borrowers many of whom have lost faith in the industry. 

Part I) Commercial Banks: Servers of the Poor? An Oxymoron No Longer

Traditionally, microcredit in Kenya was first provided by non-governmental organizations (NGOs) through donor support as a poverty alleviating initiative. Many of these NGOs over the last several decades have became microfinance institutions (MFIs) in search for sustainability and improving service delivery, including mobilizing the deposits of its clients. 

The microfinance delivery channel is still expanding. Many commercial banks operating in Kenya are now competing to win over low income clients, particularly borrowers in the microfinance sector.  Chase Bank Limited is one of the latest commercial banks in Kenya that is becoming a major player in microfinance by opening Rafiki Deposit Taking Microfinance (DTM) Limited, the newest deposit taking microfinance institution in Kenya.

An employee within one of the largest microfinance institutions stated to me that the Kenyan microfinance industry is more competitive than ever before. One reason for this could be the fact that there are more players than ever within the microfinance field as some form of microfinance is offered by almost every type of financial institution operating in Kenya. 

One institution that exemplifies the transformation of microfinance in Kenya is K-Rep Bank Limited. Once called the Kenya Rural Enterprise Program, it started as a non-governmental organization more than twenty years ago serving other non-profit organizations with microfinancial services. Soon after, it began lending directly to individual Kenyan borrowers. In 1999, K-Rep Bank was created and became a licensed commercial bank that still exists today. [1]  

An important question to consider is why are commercial banks, such as K-Rep Bank Limited, continuing or expanding its role in this once donor-supported poverty initiative? Many commercial banks once believed that microfinance was unprofitable and risky. The latter concern stems from the fact that microfinance clients often lack physical collateral traditionally used to secure a loan, the education to understand loan terms and businesses with substantial cash flow to support a loan (2-3). [2]

The answer is profit, profit, profit.

Despite the concerns listed above, commercial banks have proven to be successful players in the microfinance industry by creating profitable loan portfolios with high returns (3). [3] In fact, many researchers have found that commercial banks engaged in microfinance have several advantages over the other players in the industry. Such advantages include owning a large network of branches, thus increasing access for clients, sustainability and financial independence from donors, well-established accounting systems thus more efficiency and experienced staff (3). [4]

There are also challenges that commercial banks must overcome, including maintaining cost effectiveness as managing small loans is costly and time consuming (4). [5]  As a result, such institutions pass the high cost of microfinance operations to clients.

This leads to another question, if commercial banks maintain sustainability and profitability in microfinance despite the high cost and risk, are microfinance clients who were once excluded from the very same institutions that are now serving them also benefiting from the risk that they take on when participating in microfinance?

In part two of this blog post, I will use K-Rep Bank Limited as a case study to discuss the reality of the microcredit participation in commercial banks by focusing on the numerous fees, time commitment, and penalties of default for which borrowers are held accountable, but may not be aware.

[1] K-Rep Bank Limited. “K-Rep History.” 2011. Accessed on September 1, 2011. http://www.k-repbank.com/about-us/history.html.

[2] [3] [4] [5] Baydas, Mayada M., Douglas H. Graham and Liza Valenzuela. “Commercial Banks in Microfinance: New Actors in the Microfinance World.” Washington DC: U.S. Agency for International Development, 2007. www.uncdf.org/mfdl/readings/CommBanks.pdf.