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.
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