Should Interest Rates be Capped in Kenya? After all, markets are not perfect.

Should interest rates be capped in Kenya? The answer is simple. It depends on who you ask since there are different stakeholders in this debate. If you ask borrowers, most would genuinely answer yes. Recently, one borrower stated to me, “Something needs to be done. We borrowers should unite and call for cheaper interest.”

Within the Kenyan government, politicians have differing opinions as well. Such views are becoming public with the recent debates and defeat of the proposed amendments to the Finance Bill that would have capped commercial lending rates at four percent above the Central Bank Rate.  

Even though lending opportunities continue to expand in Kenya with the start of new commercial banks, microfinance institutions and Sacco societies, the competition has yet to provide benefit to consumers through lower rates. Specifically, within microfinance, an industry that continues to blossom, the push for profitability and sustainability as the metrics for success has not benefited consumers as interest rates continue to increase. This has created a lending culture of putting profit before the client.

When I first started researching microfinance lending in Kenya two years ago, interest rates were as high as 14% per annum, but now the rates range from 23%-30% per annum for these low income financial consumers. As a researcher of microfinance, many consumers continue to ask me: How high can interest rates continue to climb?

The reality is that all financial institutions operate in the interest of profit, not the welfare of consumers. This may be a simplistic view of lenders, but it is the reality of consumers.

Currently, as I prepare to launch a new consumer education manual to help expand the financial literacy of microfinance borrowers, I myself realize that this initiative will not be successful without increased regulation over the financial industry.

There needs to be a transformation of the current institutions of advocacy and consumer protection in Kenya at the policy level through an increase in legislation and regulation of the financial industry to compliment the efforts of Kenyan civil society organizations and consumers.

Perhaps capping interest rates would have been the first step towards achieving these important parameters necessary in any financial market? After all, markets are not perfect.

Even though economists in Kenyan and around the world are against the freezing of interest rates in any market,  I find it curious how rumors and accusations are surfacing again that members of parliament benefited (or potentially benefited) once again from the lack of concrete action toward financial regulation that would increase consumer protection in Kenya.

While many members of parliament claim that capping rates would be devastating to the economy, there is no excuse why other measures to increase consumer protection, including creating a consumer protection bureau, amending the acts that regulate the different players of the Kenyan financial market and passing the Consumer Protection Bill, have failed as well. 

After all, markets are not perfect, so where is the change when it is needed?

The (Dis)Empowerment of Microfinance

Click on the link below to read the article entitled "The (Dis)Empowerment of Microfinance" that I recently wrote for the online Kenyan news source, Jackal News.

In the article, I discuss my views of microfinance through sharing my experiences over the past ten months researching microfinance in Kenya and creating the consumer education manual "My Guide to Microfinance Lending."

Enjoy!

Jackal News : We own News and Gossip

Media Coverage for "My Guide to Microfinance Lending"

Click on the link below to read about a recent article discussing the manual "My Guide to Microfinance Lending" published in the online Kenyan news source, Jackal News.

Thanks to the Editor in Chief of Jackal News for his support!

Jackal News : We own News and Gossip

Watch a Video about this Consumer Education Manual

Here is a video that documented the creation of the manual "My Guide to Microfinance Lending."
Enjoy!

The Expansion of Mobile Banking for Self-Help Groups across Kenya

It seems that just about everyone in Kenya has an M-Pesa account that allows individuals to deposit, withdraw or transfer money to other users with their mobile phone. Everywhere I go in Kenya, more and more businesses are accepting this as a form of payment for services and products.

Through the collaboration of CARE, Equity and Orange, mobile banking will become more popular. This team made up of an international non-profit organization and two of the largest for-profit businesses in Kenya now allows CARE savings groups, known as Village Savings & Loan Associations (VSLAs), to use mobile phones to access full banking services, including the deposit of savings into interest earning group accounts (2.5% annually). This allows VSLAs in remote locations to access saving opportunities without visiting a physical banking branch. The partnership takes pride in its “security verification system” that requires three group members to provide PIN verifications for every transaction. Withdrawals and deposits are also available for these groups at any Equity or Orange agent across Kenya.

Equity will soon start offering loans using this mobile technology to these self-help groups who register as VSLAs. This is not surprising because many microfinance providers are allowing clients to pay their loans with their mobile phones and a few are starting to disburse loans through M-Pesa to clients.

In Kenya, there are over 450,000 individuals that have helped form or belong to a VSLA. These groups are trained by CARE for one year to educate the members on group-based savings and lending. The VSLAs that want to expand their access to formal finance by borrowing from Equity Bank undergo further training to expand upon their financial literacy.

Mobile based technology is making finance even more popular, and it seems that both non-profits and for-profits are taking advantage.

The Commercialization of Microfinance: The Case of Jamii Bora. How has Jamii Bora changed since becoming a commercial bank?

Since the creation of Jamii Bora in 1999, it has grown into one of the largest microfinance providers in Kenya. Recently, it merged with Citi Finance Bank to become the forty-fourth commercial bank in Kenya. Some speculate that it has now out grown its humble beginnings when founder Ingrid Munro started the organization with 50 street beggars in Nairobi. 

Such a transformation is not uncommon in microfinance. Many microfinance providers that were once non-profits or trusts operating with the assistance of donor support are now registered and regulated microfinance institutions or commercial banks that are highly profitable and claim to be self-sustaining.

During an interview that I conducted with a former Jamii Bora employee who was directly involved in its transformation to commercial status, I learned of some of the changes that Jamii Bora has undergone. Such changes include enhanced internal control and regulation along with the revision and formalization of the financial products that were created in its inception more than ten years ago with the approval of the Central Bank of Kenya.

Most of the 58 Jamii Bora branches across Kenya are now closed, but a limited number are now “sale centers” that register new clients, supply clients with information on products and services, train clients, and analyze loan performance and recovery. There is only one branch (located in Nairobi) that now accepts deposits, but members can also deposit their payments and savings in Jamii Bora accounts at Kenya Commercial Bank, Co-Operative Bank, and Postal Corporation of Kenya across the country.

The past and current Jamii Bora clients whom I interviewed seemed very confused about the transformation of Jamii Bora into commercial hood. Many of these individuals spoke of the fact that Jamii Bora is no longer “their institution.” They can no longer can identify with it. This sentiment may be one reason for the recent creation of Jamii Bora SACCO (savings and credit co-operative). I speculate that it is an attempt to regain and maintain its core base of low income, informal economy workers that made it what it is today-a household name in Kenya and an internationally recognized anti-poverty organization.

Based on my research and interview with another past employee of a Nairobi based Jamii Bora branch, the transformation has lead to the increasing of fees and changes in loan products (specifically, larger amounts are now available), and loan requirements becoming stricter (specifically, more loan insurance coverage and loan security is required). Since the current Jamii Bora finance manager would not consent to an interview or confirm any of the following information provided in the chart below, consumers should conduct their own analysis of the loan opportunities of this financial institution. 

 

Loan details: -Jamii Bora Loan: 600-100,000 Kshs (Kenyan Shillings). -Daraja Loan: 101,000-500,000 Kshs. -Biashara Loan: 501,000-3 million Kshs. -Jamii Bora Loan: first loan cannot exceed 30,000 Kshs, second loan cannot exceed                             50,000 Kshs, and third loan cannot exceed 100,000 Kshs. -Daraja Loan: first loan cannot exceed 101,000 Kshs, second loan cannot exceed  200,000 Kshs, and third loan cannot exceed 500,000 Kshs. -All loans are paid weekly by the borrower.

Loan Disbursement details: -For first cycle of loans, loans are distributed to one member every three weeks.

Membership registration fee: -200 Kshs for every client.

Chattel Mortgage Fee: -2,500 Kshs required for only Biashara and Daraja loans.

Additional expenses for application: -A photocopy of the borrower’s national identification card (estimated cost of 5 Ksh).

Insurance fee: -1% of the principle loan amount and additional 5,000 Kshs for  Daraja and Biashara loans.

Disbursement Fee: -40 Kshs or more depending on the loan product.

Interest rate: -20-22% per year depending on the loan product (flat rate).  (This rate is subject to change at any time with the discretion of the lender.)

Required security for Loans: -Savings of at least 50 Kshs per week is required for at least six weeks. -The total amount saved must equal twice the amount of the principle loan amount  before loan disbursement. -Savings of at least 50 Kshs a week per borrower is also required during the loan duration. -Household or business items are also required to be pledged by borrowers. -All members of the borrower’s group must serve as guarantors.

Required Training: -No fee is charged for required orientation and training for group based loans. -Training takes place before all loan distributions for two hours per day for one week. -Additional training is available for a fee of 1,000 Kshs.

Penalty for late payment or default: -Unspecified monetary penalty. -The borrower risks losing community relations (social capital). -The members who guaranteed the loan must repay or the bank will take the savings of   the group members to pay the amount owed.   -All loans for the group members of the defaulter are suspended until the amount owed is paid. -For defaulters, further loans are suspended. The group decides if and when the defaulter  of the group is eligible to borrower again. Additional approval is required from the bank  as well. Ifanother loan is approved, the loan amount must be smaller than the loan for  which the member defaulted, and the savings of the defaulter must be more than twice  of the principle loan amount.

Story of Microfinance Borrower: Meet John

Meet John...

John thought that he finished paying his loan, so he started planning to borrow a larger amount to invest in machinery for his welding business. After asking a loan officer for a loan application form, John was told that he was not finished paying his current loan. His loan repayment period was another two months.

When John could not present his receipts that are issued for each loan payment, the loan officer told him that it was not her responsibility to keep track of his loan payments. John continued to pay his loan for another two months because he felt obligated since he did not keep any records or receipts of his past loan payments.

John plans to be more responsible during his next loan period by keeping track of his loan payments and maintaining his receipts. 

What can borrowers learn from this story?

Consumer rights do not exist without consumer obligations. Consumers have responsibilities while participating in the financial sector that they have to follow in order to enjoy their rights.

How did this story contribute to the manual?

In the manual, there is a section that describes some of the most important rights for financial consumers in Kenya, including the right to consumer education, the right to be informed, and the right to redress and to be heard. But, it is important to keep in mind that consumers also have responsibilities, one of which is described in the story of John. Consumers need to be proactive in their participation in the financial sector by accepting the following responsibilities. Only then can borrowers understand the investment and risk of lending that will allow each to make beneficial financial decisions.

Remember as a financial consumer, you have the...

Responsibility to choose for yourself what financial services to use.

Responsibility to be critical in questioning or asking for information.

Responsibility to understand loan agreements.

Responsibility to comply with or honor loan agreements.

Responsibility to evaluate the costs of financial products before making any decisions.