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.
[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.
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