Part II) Commercial Banks: Servers of the Poor? An Oxymoron No Longer

During research for this project, I found that taking on a microfinance loan is very complex and expensive for not only the lending institution, but the borrower. Most best practices in microfinance are centered on whether microfinance is sustainable and profitable for institutions, but the same consideration is rarely given to microfinance clients. So, I pose the same question that is at the end of part one of this blog post.

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?

Last summer, I interviewed a woman named Catherine who became a borrower of one of the leading microfinance providers in Kenya. She explained to me that she still does not understand why she owed the company 4,000 Ksh more than she borrowed. There are often numerous fees, time commitment, and penalties for default that borrowers are not aware of or do not understand.

For example, the costs attached to a K-Rep microfinance loan, either a Chama Baishara Loan (group based) or Individual Microfinance (IMF) Loan, include the following:

Account fees: -Individual account opening: 300 Ksh per person (both loans). -Group collateral account: 40 Ksh per month (waived if amount is over 30,000 Ksh). -Group collateral account closing: 100 Ksh. -Group collateral refund: 100 Ksh.

Group membership registration fee: -200 Ksh per person (only group based loans).

Passbook fee: -Included in the group membership fee (only needed for group based loans).

Application fee: -1.5% of the principle loan amount (both loans).

Additional expenses for application: -A copy of the borrower’s national identification card (estimated cost about 5 Ksh).   -Passport sized photo is required (estimated cost for a set of passport photos about 100-200 Ksh). [1]

Insurance fee: -1% of the principle loan amount (both loans).

Commitment Fee: -1.5% of the principle loan amount (only individual loans).

Interest rate: -16.5% per year for group loans (flat rate) -21% per year for individual loans (reducing balance).

Required security for Chama Baishara loans: -Savings of at least 300 Ksh for eight weeks per borrower is required. The total amount saved must equal 20%-30% of the principle loan amount before loan disbursement. -Savings of at least 300 Ksh a week per borrower is also required for the loan duration. -Household or business items are also required to be pledged by every borrower. -All members of the borrower’s group must serve as guarantors.

Required security for Individual Microfinance loans: -Physical security such as land title deed, share certificate, and log book.

Required Training: -No fee is charged for required orientation and training for group based loans. -But, the required time commitment is 6-8 weeks of training with a K-Rep Business Development Officer. -No training required for individual microfinance loans.

Penalty for late payment or default: -No monetary penalty, but the borrower risks losing social capital/community relations. -For defaulters, further loans are suspended. The group decides if and when the defaulted member of the group is eligible to borrower another loan. If another loan is approved, the loan amount must be lower than the first loan for which the member defaulted.  -The group has the authority to confiscate the collateral used to secure the defaulted loan. -If 5% of a group defaults, all loan disbursements of the group are suspended until the business development officer investigates and concludes that the group is capable of borrowing once again. -For individual microfinance loans, the bank has the authority to confiscate the collateral used to secure the defaulted loan.

According to research conducted by microfinance transparency (MFI), a non-governmental organization dedicated to increasing transparency in microfinance worldwide, the annual APR rates (which includes the sum of the interest, fees, insurance, taxes, and security deposit) for microfinance loans offered by K-Rep Bank Limited range from 46%[2] to as high as 63.4%[3] of the principle loan amount.

I argue that borrowers such as Catherine may not realize the investment and planning required to apply and pay off a microfinance loan. There are several possible microfinance practices that may be at fault. 

During my research, I learned that not all fees and commitments (such as those describe above) are included in microcredit contracts, microcredit borrowers generally do not receive a copy of their loan contract and microcredit contracts are only written in English. It is in the interest of the borrower and the lending institution to alter such practices by becoming more transparent and increasing user friendly information for clients. 

This is where my current project, the consumer education manual, comes into play. The purpose of the consumer education manual is to prepare borrowers to understand the total investment in terms of monetary and time commitment along with the risk when taking a microfinance loan. 

Such an initiative is not to deter innovative business women and men from participating in microfinance, but to allow them to make an educated decision whether it is beneficial for their businesses and financial well being to participate and take a loan. Kenyan business men and women are capable, if given the necessary resources, to make that decision on their own. Just as financial institutions are aware of the risks of participating in microfinance, borrowers deserve the same.  

 
[1] Fees are required to be posted in every branch of every financial institution regulated by the Central Bank of Kenya. All fees are quoted in Kenyan Shilling (Ksh). 

[2] Microfinance Transparency. “K-Rep Bank Limited: Katikati Loan Interests Rates.” 2010. Accessed August 5, 2011. http://www.mftransparency.org/data/products/394/?calculationType=apr&currencyType=74. 

[please note that the data taken from this source is based on K-Rep's KatiKati loan-a microfinance product that is no longer available. K-Rep recently changed its microfinance products as of September 2011].

[3] Microfinance Transparency. “K-Rep Bank Limited: Juhudi Loan Interests Rates.” 2010. Accessed August 5, 2011. http://www.mftransparency.org/data/products/392/?calculationType=apr&currencyType=74.

[please note that the data taken from this source is based on K-Rep's Juhudi loan-a microfinance product that is no longer available. K-Rep recently changed its microfinance products as of September 2011].

Protecting Consumers and Banking Institutions: Why not both?

Most recently, the Central Bank of Kenya and the Kenyan Bankers Association launched the credit information sharing initiative. The first credit reference bureau, The Credit Reference Bureau Africa Limited, was licensed in February 2010 (44). [1]  Such institutions allow for credit information sharing between financial institutions making it easier for information about clients to be disseminated. The Central Bank of Kenya states that such an innovation will lead to cheaper credit for consumers as “information symmetry lowers the risk premium and search costs loaded in the cost of credit.”  Thus, more consumers will be able to access credit at increasingly affordable rates (45). [2]

 

If such an initiative is made to protect banks, why not create a resource for clients to learn more about their banking institutions, specifically about credit and other financial products?  Such a resource could serve as an educational tool that offers consumers the opportunity to protect themselves and their valuables, save money and access credit at a rate that they can afford through becoming educated about the microfinance industry.  During this project, I inspire to create such as a resource through this consumer manual.

While working to create a consumer education manual, I have learned of another organization that is doing great work with similar objectives. Next month, Microjustice For All, a non-profit organization that provides legal services for low income individuals in developing countries, will launch the Fair Kampaign in Kenya.

Microfinance institutions, lawyers and consumer advocacy groups will meet in Nairobi, Kenya to discuss loan contracts used in the Kenyan microfinance industry to improve upon client protection measures such as debt counseling and to create fair contract guidelines.  I am excited about the opportunity to learn from such an organization that is dedicated to using collaboration between different stake holders in microfinance to improve upon consumer protection for clients.  Please visit http://www.microjustice4all.org/ and http://www.fairkampaign.org/ for more information.

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[1] [2] Central Bank of Kenya. “Annual Report 2009-2010.” Nairobi: Central Bank of Kenya, 2009. Accessed July 15, 2011. http://www.centralbank.go.ke/publications/default.aspx

Why women are the focus of the manual?

Many individuals whom I have met throughout the duration of my project have asked me why the manual is designed to assist Kenyan women. Why are women the target audience and beneficiaries of the manual?

Below I explain the role of women workers in Kenya to justify why educational opportunities and resources, such as the manual, are especially important for this segment of the population.

In Kenya, the labor market is made up of 11.4 million workers. Like many developing countries, the majority of these workers, an estimated 9.6 million Kenyans, earn a living in the informal economy. [1]  The informal economy, defined as small scale, unregistered, unregulated and unprotected income-earning activities (11-12) [2], is the largest sector of employment that supports millions of Kenyan families, particularly in urban areas. Thus, even with an active informal economy, employment security is rare and about 40% of Kenyans are unemployed. [3]  

Informal employment is particularly important to the female workers of Kenya. In fact, 60% of workers in the Kenyan informal economy are women (21). [4] Men in Kenya dominate the formal economy, and even if women participate the majority are employed in the service industry that are low income paying jobs (12). [5] Unfortunately, even with the increase of women employment in the informal sector, “the link between working in the informal economy and being poor…is stronger for women than for men” (14).[6]  

Such a finding could be attributed to the fact that more than half of women workers in the informal economy are wage workers rather than self employed (21). [7] Those that are employed through operating their own small and medium sized enterprises hire less employees and earn almost half as much as men who run comparable businesses (13). [8] Even as women are entering into employment, their “nonmarket activities” remain consistent adding to their daily work load, but such work is not accounted for within daily productivity values. Thus, women are working harder and longer hours more than ever before, but gaining less (13). [9]

As Kenya has unequal opportunities in both the formal and informal economies for females, educational resources for Kenyan women are important as they face many barriers to start and build businesses. As financial exclusion of women has decreased with the expansion of Kenyan microfinance industry, women also need to protect themselves with knowledge of such programs to ensure that they can make an informed decision whether to participate or not participate in microfinance. It is suggested by a publication of the World Bank that increasing access to education among women can led to Kenyan GDP growth (10). [10]

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[1] [3] [4] The United States of America. The Central Intelligence Agency. "Kenya." The World Fact Book. STAT-USA. 2011. Accessed July 26, 2011. https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html

[2] [6] [7] The International Labor Organization. "Women and Men in the Informal Economy: A Statistical Picture.” Geneva: International Labor Office, 2002. Accessed July 26, 2011. www.ilo.org/public/libdoc/ilo/2002/102B09_139_engl.pdf
 

[5] [8] [9] [10]  Ellis, Amanda. Gender and Economic Growth in Kenya: Unleashing the Power of Women. Washington, DC: World Bank, 2007.

Who will benefit from the manual?

The manual will be designed to help individuals, specifically women, who run small and medium sized businesses in the Kenyan informal economy become knowledgeable of the products offered in the Kenyan microfinance industry. Many financial institutions, whether commercial or non-profit, offer loans, savings and insurance for low income individuals, but often the details, requirements and procedures are different.  

East Africa Drought: Did you know?

This post does not concern the progress of my project, but concerns a matter in Kenya that has been covered by most local news sources and around the world.

Did you know that the horn of Africa is experiencing the worst drought in history? According to the BBC, more than 10 million people are thought to be at risk of starvation. Recently, the United Nations declared famine in two areas of Somalia. An estimate of 1,000 Somalis are crossing over into Kenya everyday to escape the consequences of the drought.

As I have been welcomed into communities across Kenya to conduct research and to volunteer, I ask those in my community to support the individuals affected by this drought just as they continue to support me, an individual from your community. As it is pointed out in Kenya, the people affected by this drought could be you or me. We do not choose where we are born, but we can choose to remain vigilant about the plight of others across the world to ensure that we prevent and not contribute to future injustices.

• Please learn more: 

http://www.bbc.co.uk/news/world-africa-14271528 
http://www.nytimes.com/slideshow/2009/09/08/world/20090908KENYA_index.html?ref=famine 

• Please consider giving: 

The Kenyan Red Cross that is currently holding a Drought Response Initiative to raise 1.9 billion (Ksh) to support 1.8 million people. iBelow is a link to a list of organizations published in the New York Times.
http://tinyurl.com/preventfamine

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.