Why Nairobi? What institutions will be featured? Why these institutions?

• Why Nairobi?

Due to financial and time limitations, I have decided to tailor my manual to one province, the province of Nairobi. According to the 2009 Census conducted by the Central Bureau of Statistics in Kenya, the province of Nairobi has over 3 million inhabitants living within 273 sq miles (684 sq km). It holds almost 8% of the entire Kenyan population. Even though the province is not one of the largest in Kenya, it is important to note that it is the most populous per mile or kilo meter. [1] 

Some credit the growth of the province to Nairobi, the capital city. This city alone has over 2 million inhabitants (that's more than half of the total population of Nairobi province). [2] Nairobi is currently the 12th largest city in Africa, and the city is expected to grow as it has over the decades. [3] 

• What institutions will be featured?

The manual will document numerous microfinance programs of deposit taking microfinance institutions (DMF), Savings and Credit Co-operative Societies (SACCOs) and commercial banks serving consumers in the province of Nairobi. 

• Why these institutions?

Even though this manual is designed to serve the province of Nairobi by featuring the institutions with adequate presence in the region, this manual has the potential to help consumers all over Kenya become familiar with the lending practices of the Kenyan microfinance industry.

Thus, outreach (number of clients currently serving, particularly women), accessibility (number of branches) and product diversification (types of services) were considered. Most of these institutions are active throughout Kenya.

Furthermore, my manual is meant to be a living document that I hope will motivate Kenyan consumer advocacy organizations to contribute further data about microfinance in the other eight Kenyan provinces. The continuation of this project will prepare consumers to ask questions and critically analyze the massive financial opportunities in their town or city.

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[1] [2] Brinkhoff, Thomas. “Kenya Provinces.” City Population. Accessed July 26, 2011. http://www.citypopulation.de/Kenya.html

[3] The World Bank. “Kenya: Country Brief.” Washington, DC: The World Bank, 2001. Accessed July 27, 2011. http://go.worldbank.org/YZJLVL3LX0  

The Evolution of Kenyan Microfinance

Before the microfinance industry, people around the world have been borrowing and saving using various sources outside of the formal financial sector. Informal financial services ranging from loan sharks, community members and saving groups were once the only source for low income individuals who were unbanked or under-banked. Such sources are still commonly used in both rural and urban areas, but now microfinance is a new source for loans, savings and insurance for the estimated 38% of Kenyans who do not have access to any type of financial services and the 35% of Kenyans who might be unhappy with the informal financial services they use. [1]  

While researching microfinance in Kenya I have found that microfinance services come from different types of Kenyan financial institutions, thus consumers wishing to participate in the sector have a variety of choices. Traditionally, non-governmental organizations and microfinance institutions were the only sources for microfinance, but now commercial banks, savings and credit co-operative societies (SACCOs) and the Kenya Post Office Savings Bank (Postbank) are also providing microfinance to Kenyans. [2]  

The Central Bank of Kenya in its Bank Supervision annual report 2010 recognized this trend, specifically within commercial institutions that have “…either down-scaled their products or are in the process of setting up subsidiary companies to specifically engage in microfinance business.” [3]

 

It is the goal of the Central Bank of Kenya to expand the microfinance industry as its goal and purpose is to meet the needs of the unbanked through expanding access to financial services for poor individuals and families along with small business, particularly Micro and Small Scale Enterprises (MSEs) and informal sector businesses. [4] Such a goal also fulfills Kenyan Vision 2030 in which the government aims to improve and expand access to the financial sector to improve the quality of life for Kenyan citizens by 2030. 

After reviewing this information, the question I ask myself is why microfinance, which started as a source of pro-poor financial delivery, has now expanded to institutions that traditionally excluded the poor? Is it the fact that microfinance has become a proven profitable sector with a high recovery rate that exceeds any other financial institution? What does the redefining and expansion of microfinance mean for consumers? 

While researching microfinance in Kenya, I have asked myself these questions in order to understand the current practices of the sector and how it might impact consumers.   

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[1] [2] [4] The Central Bank of Kenya. “Annual Report 2008.” Nairobi: Central Bank of Kenya, 2008. Accessed July 15, 2011. http://www.centralbank.go.ke/publications/default.aspx

[3] The Central Bank of Kenya. “Bank Supervision Annual Report 2010.” Nairobi: Central Bank of Kenya, 2010. Accessed July 13, 2011. http://www.centralbank.go.ke/publications/default.aspx

Collaboration with Consumers Federation of Kenya!

I am pleased to announce that I am collaborating with Consumers Federation of Kenya, one of the most dynamic consumer advocacy organizations in Kenya.

My project will contribute toward this organization's financial education efforts for the Kenyan population to make educated decisions while participating in the financial sector. There will be more to come regarding the details and progress of the collaboration.

Please visit the website below to read more about the partnership.

http://tinyurl.com/consumerpartnership

What is Microfinance? A Brief Explaination.

Microfinance is the provision of financial services ranging from credit, savings and insurance for low income individuals who were in the past excluded from formal financial institutions.

Traditionally, microcredit is characterized by high interest rates and no requirement for physical collateral. Rather, joint liability between borrowers in a lending group is used to ensure repayment of loans.

The characteristics and requirements of microfinance programs are continuing to evolve in different countries over time.

Problem=Lack of Consumer Protection in MF, One Solution=Expanding Consumer Education!

While working and conducting research in the summer of 2010 and January 2011 within a microcredit program in Kenya, I became aware of the lack of consumer education and protection measures for microcredit clients. To bring awareness to this issue, I will work in Nairobi, Kenya from June 2011-May 2012 and collaborate with local consumer advocacy organizations to create what I call “a consumer education manual” that documents the services, requirements and procedures of microcredit programs in the five largest microfinance institutions (MFIs) in Kenya.  

The manual will be used by consumers to understand the requirements and operations of these different microcredit programs. Most importantly, the experiences of microcredit borrowers will be included in the manual to allow potential borrowers the opportunity to learn about the microcredit programs through their peers, thus allowing current microcredit borrowers to contribute to the content and structure of the manual. The goal of the project is to contribute to the transparency of the microfinance industry and current consumer education campaigns to empower consumers, particularly women, to make educated financial decisions.
 

The manual will be hosted on the websites of several consumer advocacy organizations and blogs to increase dissemination. Once the manual is established in Kenya, it can be duplicated in other regions to contribute toward worldwide transparency of microfinance and advocacy for consumer protection and education throughout the world.

From Mary’s Story to the Broader Picture

In one of my first posts, I told the story of one microcredit borrower, Mary. Now, let’s look at the broader picture.

There are 18 million people in Kenya, about 60% of the population, who are considered low income. Even though these individuals run the majority of the 1.3 million micro and small enterprises (MSEs) that make up 20% of income generating activities and contribute 18% of Kenyan GDP, only 10.4% of MSE owners under take financial services.  The government of Kenya has cited this exclusion as disadvantaging to the operations and expansions of such businesses. [1]  

With microfinance gaining popularity throughout the world over, the proliferation of financial services for the poor in Kenya has been under way over the last several decades. Individuals and their businesses traditionally excluded from the formal financial system are now the target consumers of Microfinance Institutions (MFIs). Currently, there are over 100 organizations that offer microfinance services in Kenya.[2]

Unfortunately, as the microfinance field expands in Kenya consumer protection measures are not keeping up. What is equally important to the expansion of credit and saving opportunities in Kenya is the expansion of consumer protection and education initiatives to ensure that individuals know how to use these new financial services to make educated financial decisions to protect themselves from default and unethical banking practices.

Mary is one example of what can happen to one of the hundreds of thousands of microfinance clients when  access to consumer education and consumer protection measures is lacking. The microfinance field targets low income individuals, who are traditionally most disadvantaged group, specifically when it comes to education. Thus, microfinance and consumer protection initiatives (specifically legislation) should always co-exist. 

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[1] [2] “Regulation and Supervision of Microfinance Institutions in Kenya” by George Omino. Accessed February 28, 2011. Published on March 2005 by The Microfinance Regulation and Supervision Resource Center within the Consultative Group to Assist the Poor. http://www.microfinancegateway.org/p/site/m//template.rc/1.9.27704

Why is expanding consumer protection in microfinance important? Mary's Story

In Kenya, there are millions of microcredit borrowers, many of whom are poor, uneducated women running their own businesses to support a better life for their children. Even though microfinance programs are no doubt well intentioned, unethical and marginalizing practices are commonly used. Just as high suicide rates among microcredit borrowers in India are linked to increased stress from the combined use of high interest rates with short payment cycles, over-indebtedness, and the application of high pressure repayment tactics by microcredit lenders, Kenya has the potential to witness such travesties if action is not taken. 

While working to create a microcredit program within several rural communities in Kenya during the summer of 2010 and winter of 2011, I learned of the many challenges of women microcredit borrowers. It was one borrower, Mary who taught me the repercussions that unethical microcredit practices can have on the lives of borrowers. Mary runs a tailoring business out of her home in a small village in Kenya with one sewing machine working to pay for her children’s education with the hope that they may have a life with better economic prospects than her own.  Mary took a microcredit loan to purchase materials for her business.   However, one month after enrolling in the microcredit program, Mary became very ill and required extensive medical treatment. With medical bills climbing and her inability to work due to illness, Mary began losing clients.  Soon afterward her business failed. 

Despite these hardships, Mary continued to make regular payments on her loan. When I asked her why she did not postpone her payments, an option explicitly included in her contract in case of financial emergency, she stated that she thought she had to honor the contract that she signed. She wanted to avoid the various repercussions that other women borrowers she knew experienced when they defaulted on their microcredit loans, including social tension, physical abuse from husbands, loss of friends, and loss of household items.  

Based on my knowledge, I still ask myself why the microcredit staff did not protect their client and participant by deferring her payments and why Mary did not enforce her contractual rights as a participant in this program. I describe Mary’s story because it is illustrative of a serious problem in the provision of microcredit in Kenya. There exists a great deficiency in the realm of consumer education and legal protection for microcredit borrowers that results in the marginalization of women.