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