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.

Story of Microfinance Borrower: Meet Susan

Meet Susan...

Susan was a first time microfinance borrower when she became very ill. As a result, her hotel failed and she was unable to pay her loan. 

Upon her second missed payment, her group members came to her home to take her property, including her bed, cooking gas and television. The group members explained to Susan that they had to take her property in order to pay the remaining amount that she owed because they could not afford to assist her while paying their own loan. 

Susan regrets not understanding such consequences when signing her loan agreement. She did not understand what would happen to her home, her business and to the other group members, if she did not pay her loan. 

What can the microfinance industry learn from this story?

The story of Susan can be found across the world. In the past, some of the most famous cases in which thousands and often millions of microfinance borrowers were unable to pay their loans (known as the repayment crisis) occurred in countries, including India, Bosnia and Herzegovina, Nicaragua, Bolivia and Pakistan. 

It disturbs me that the majority of Kenyan microfinance borrowers whom I interviewed have paid for a defaulter or defaulted on a loan. 

Could the “repayment crisis” reach the Kenyan microfinance industry? 

I cannot answer this question as my sample size for this project is too small (only 7 microfinance programs were profiled and 105 borrowers were interviewed) and there are various factors that contributed to the repayment crisis (including concentrated market competition and multiple borrowing, overstretched microfinance institution systems and controls, and erosion of microfinance institution lending discipline[1]).   

But, the Kenyan microfinance industry should learn from the commonalities of the cases listed above and plan appropriately.

How did this story contribute to the manual? 

To prevent such a situation in the future, the manual will contain information about the common consequences of not paying a microfinance loan, specifically what actions lenders can and cannot undertake in order to recover the debt of a borrower.

By reading this section of the manual, borrowers will hopefully be better equipped to fully comprehend the risk of borrowing and hold lenders or auctioneers accountable for their actions.

That said, I admit that the lack of financial literacy is not always the culprit for detrimental financial decisions. Circumstances of impoverishment, specifically trying to survive day to day, led individuals to undertake the risk of borrowing despite the consequences. 

Some individuals feel that they have no choice but to join any microfinance program that will lend to them. In their eyes, it is a decision based on survival. As one borrower stated during an interview, “Life happens and there is nothing that you can do.” In other words, if she defaults, then she defaults. In her eyes, if she does not try to survive with the help of microfinance, then she will be worse off.  

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[1] Please read “Growth and Vulnerabilities in Microfinance,” a study complied and published by The Consultative Group to Assist the Poor, for more information. 

http://www.cgap.org/p/site/c/template.rc/1.9.42393/

Story of Microfinance Borrower: Meet Ibrahim

Meet Ibrahim...

Ibrahim thought that he understood his loan terms when he signed his loan agreement, but months after receiving his loan he regretted borrowing to support his transport (matatu) business. 

Ibrahim thought that his grace period was one month, so he did not plan to start paying his loan until one month after he received it.  

Three weeks after receiving his loan, a loan officer called Ibrahim asking why he did was not paying his loan on time. The loan officer accused Ibrahim of being a reckless borrower for not understanding his loan terms.

Ibrahim advises all borrowers to seek the assistance of an advocate to review their loan agreements.

What can the microfinance industry learn from this story?

Many borrowers struggle with understanding their loan terms and requirements. Dozens of borrowers, whom I interviewed, accused their lenders of cheating them as the result of the borrower misunderstanding information or the lender misrepresenting information about a loan.

It is extremely important that lenders take the time to verbally explain and issue copies of loan agreements to every borrower. During my research, I found that microfinance programs usually give loan agreements for individual loans, but not for group based loans.

This change might preserve relationships between lender and borrower by ensuring that the borrower understands the risk and investment of borrowing.

How did this story contribute to the manual? 

Ibrahim is not the only borrower who has experienced challenges as a microfinance borrower.

In order to help borrowers address their many challenges, the manual will contain a list of resources, including consumer advocacy organizations, legal assistance providers (advocates), and the Kenyan regulation authorities.

Each organization offers different services, such as financial training, legal representation, and advice on consumer rights.

This portion of the manual will help microfinance borrowers to learn about the different Kenyan organizations that they can turn to when help is needed.

Story of Microfinance Borrower: Meet Rachael

Meet Rachael...

Rachael is a small scale farmer who, due to a drought, was unable to sell enough stock to pay her loan.

As a result, she was jailed by her lender for not making payments. Even though Rachael’s loan repayment period was not finished, her lender told her that she would remain in jail until the entire loan amount was paid. Rachael tried to explain to her lender that she could start paying her loan once again next month, but this was not acceptable to the lender.

Four days later, Rachael’s family was able to collect the amount that she owed. Some of the family members were angry with Rachael for not paying her loan. Rachael tried to explain that her crops were not doing as well as she had anticipated due to the drought.

What can the microfinance industry learn from this story?

Not all borrowers purposely avoid paying their loan(s). There are borrowers who want to pay their loan(s), but many experience emergencies or financial hardships that prevent them from making payments. Rather than running away, Rachael was willing to talk to her lender about her financial hardships.

Microfinance programs should consider changing their credit policies to allow some borrowers (under specific circumstances) to refinance their loan or reschedule their loan payments. All of the seven microfinance lenders that I researched did not allow these options for its members. 

Such credit policy changes might prevent defaults and protect the borrower, such as Rachael, from over-indebtedness and other financial struggles, along with weakening of community relations.

How did this story contribute to the manual? 

Rachael’s rights were violated because she was not arrested with a court order. A borrower in this situation, should ask themselves whether their lender has the legal authority to take this action?

To prevent such a situation in the future, the manual will contain a list of information about the consequences of default, specifically the actions that lenders CAN and CANNOT undertake to recover the debt of a borrower.

This portion of the manual will help to increase the knowledge of borrowers about their rights if their loan is considered delinquent or in default.

As the majority of the borrowers whom I interviewed were defaulters or paid for a defaulter, I think that this section of the manual is extremely important.

Story of Microfinance Borrower: Meet Beth

Meet Beth...

For nearly five years, Beth has been a microfinance borrower to support her passion and expand her career as a tailor. Her goal as a borrower is to pay her loans as quickly as possible in order to prove that she is responsible to borrow bigger amounts.

It was not until her third loan that her tailoring business was earning enough profit to allow her to finish paying one month early.

When Beth tried to settle the remaining balance of her loan early, she found that she had to pay a penalty. She did not understand why the lender would not take her payment without the additional fee. Beth still feels that she was punished by her lender for being a good borrower.

What can the microfinance industry learn from this story?

Similarly to the story of Daniel (in the last post), the lack of preparedness of borrowers and the lack of transparency of lenders often puts both parties at a disadvantage. 

Beth was not able to pay her loan without additional financial hardship, and her confidence as a borrower weakened. The lender lost the trust and confidence of a long term client.

How did this story contribute to the manual?

Beth was not able to pay her loan early as she had hoped.  The ability to pay early is something that this borrower should have known before signing her loan agreement. If Beth had the proper information about the lender fees, she might have planned differently.

To prevent such a situation in the future, the manual will contain a list of information that every borrower should obtain, including ALL lender fees and charges, when searching for a lender and before signing a loan agreement.

This portion of the manual will help to increase transparency of microfinance practices by helping borrowers to analyze what information to obtain about their loan.

Story of Microfinance Borrower: Meet Daniel

Story of Microfinance Borrower: Meet Daniel

 

Meet Daniel...

Daniel borrowed his first loan in order to expand his charcoal business. He was able to pay half of his loan amount until his business was burned in a fire. Daniel was relieved when he remembered that he paid for loan insurance, thus he expected that his lender would forgive his debt.

When the loan officer told Daniel that his debt would not be forgiven, Daniel asked why he had paid an insurance fee. The loan officer explained to Daniel that the insurance only pays the loan balances of borrowers who die.

With this news, Daniel left the lending program because he thought that his lender was lying to him. He is now a defaulter, but he states that he cannot pay the rest of the loan as he must use all his income to start a new business. 

What can the microfinance industry learn from this story?

Often, the lack of preparedness of borrowers and the lack of transparency of lenders puts both parties at a disadvantage. 

Daniel was not able to pay his loan and rebuild his business like he expected, and the lender lost a client and did not recover the rest of the loan amount.

How did this story contribute to the manual?

Daniel did not have the correct information about his loan insurance before applying and borrowing a loan. If he knew this information, he might have joined another microfinance program or planned differently. 

To prevent such a situation in the future, the manual will contain a list of information that every borrower should obtain, including information about loan insurance, when searching for a lender and before signing a loan agreement.

This portion of the manual will help to increase transparency of microfinance practices by helping borrowers to analyze what information to obtain about their loan.

Why are the stories of microfinance borrowers important to consumer education?

I have been told that in microfinance there are no bad borrowers; there are only bad lenders.

The justification for these statements come from the responsibility that is placed on lenders to only lend amounts that they know they can recover. Thus, lenders should ensure that their clients are capable of repaying their loan(s) and able to understand their loan terms before lending any amount.

In microfinance, such responsibility is particularly important as most borrowers in such programs are small business owners usually living day to day and lack the educational background that is necessary to read and understand loan applications and agreements.

But, I also believe that microfinance borrowers are not alone in their struggles. Financial consumers, in the developing and undeveloped world, struggle with financial literacy and the skills necessary to ensure that they will benefit rather than suffer from borrowing.

In the world of finance, such consumers are often blamed when they make bad financial decisions. Unfortunately, the practices of lenders often make the consequences for consumers who are not prepared or unable to protect themselves even worse.

So, who is to blame for the misfortunes of microfinance borrowers?

Below are stories that I documented during interviews with past and current microfinance borrowers in which borrowers and/or lenders did not act responsibly and/or ethically. Such stories are important to the upcoming manual because each allows the reader the opportunity to learn from the past experiences of other borrowers, and illustrates why the sections of the manual are applicable to the lives of microfinance participants.

In upcoming blog posts, you can read such stories to learn about some of the challenges of Kenyan microfinance borrowers, and why the challenges of borrowers are important to understand when preparing a consumer education material to expand protection for microfinance participants.

Financial Literacy: How would you rate your knowledge of the financial services that you use?

What do hand-washing and financial illiteracy have in common? More than you think!

Click on this link [1] to learn the answer while listening to a recent podcast by Freakonomics radio that discusses the common reality of financial illiteracy and its contribution to economic stability.

In recent years, financial literacy has become a trend in microfinance since lender abuse and struggles of microfinance borrowers are becoming increasingly covered by the media and studied in academic research. The most common solution implemented is to attempt to increase the financial education for borrowers who are often low income and uneducated (rather than increase regulation).  

Even though microfinance has a minimal existence in the United States, the topic of financial illiteracy of Americans is receiving more attention since the events of the Great Recession.

In this Freakonomics podcast, listeners learn from researchers and policy makers about the reality of financial illiteracy among Americans, the importance of financial literacy in the United States, and the different ideas to educate and protect the American public.

If you are an American reading this blog post, how would you rate your knowledge of the financial services that you use?

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[1] http://www.freakonomics.com/2012/01/19/what-do-hand-washing-and-financial-illiteracy-have-in-common-a-new-freakonomics-radio-podcast/

Update on the Kenyan Consumer Protection Bill 2012

Upon decision with a staff member of Consumer Information Network
(CIN), a Kenyan consumer organization, I recently learned that the
Commission for Implementation of the Constitution (CIC) made the
decision to remove the Credit Section of the current working draft of the
Consumer Protection Bill. The Credit Section contained various financial
based rights for the consumers of credit.

The reason for this decision is to put the responsibility of financial based
rights in the hands of the financial sector. The staff member of CIN
justified the decision by writing that "[t]he reason as to why we [at CIN]
agreed on this [decision] is because consumer issues are vast and diverse
and can therefore not be taken care of in a single legislation." The argument
is that the credit section was too specific for the bill.

I can understand the position of the CIC. I was not satisfied with the provisions
of the credit section of the bill; there was much need for improvement (see
my previous blog posts). This decision of the CIC would give the opportunity
for current legislation and regulations of the financial sector to be amended to
ensure financial based consumer rights.

The CIC decision is also unfortunate because the new constitution requires a
consumer protection bill, thus ensuring consumer protection will soon be a
reality for consumers. It is a shame that consumers will have to patiently
wait once again until their rights in the financial sector will be protected.

If the responsibility is now in the hands of the financial sector, when will
legislation and regulation be amended or drafted to ensure the rights of
consumers are protected? How long does the financial consumer have to
wait?

I argue that financial education, the main goal of my project, is only one
part of the equation to ensure consumer protection. Getting individuals to
change their behavior is difficult and not every consumer has the same
knowledge about the financial sector and its services.

Government also has a role in protecting the consumer. Thus, it is vital that
protection for financial consumers should be upheld through increased
transparency and regulation. The current legal framework of the financial
sector in Kenya has limited, very limited, protection for consumers.

As the CIC now puts the responsibility of financial consumer interests in
the reformation of the financial sector, I hope that the financial based
rights as represented in the Credit Section will be improved upon and
implemented sooner rather than later.

What does the repayment rate of the microfinance industry NOT measure?

During my various visits to Kenya and now as a Nairobian, I have met hundreds of Kenyan borrowers. I also had the privilege to interview over one hundred of those individuals who borrow from microfinance. To my surprise, more than the majority of my interview subjects have paid for the loan of another borrower or have known a defaulter in his or her family or community.  

This was a surprise to me because the microfinance industry claims to have a high repayment of loans. It is often estimated that 96-98% of all loans are paid in full. I never considered how the microfinance industry measures repayment. Does the industry consider who paid the loan? 

The high repayment rate reported by the microfinance industry implies that low income borrowers are able to invest their loan in their business that helps it to grow and generate a profit that allows them to pay back their loan. 

From the individuals whom I have met and interviewed, I have learned that borrowers often use funds from sources other than the profit earned from their business(es) to pay back their loan(s). These other sources include borrowing from more than one lender, family members, individuals in their communities or self-help groups. Most of the Kenyan women whom I meet throughout Nairobi and the Rift Valley participate in at least one self-help group, specifically Chamas that is an informal savings group in which each member contributes a predetermined amount of money to the group at each meeting and one member is chosen to keep the contributions. Despite the proliferation of opportunities from financial institutions and banks, these sources of informal finance in Kenya are still common to help individuals cope with daily life, including the requirements of microfinance. 

As explained, loans are often paid with the help of others. Loan repayment is not the sole responsibility of borrowers. Most often, this responsibility is passed to the guarantors of borrowers who are in the same lending group. If a borrower defaults, his or her guarantors are legally responsible for paying the loan, including penalties. In fact, the microfinance lender will freeze all future loans of the group and even take the savings of the guarantors until the loan balance of the defaulter is paid in full. This puts financial and social pressure on borrowers and their guarantors who have their own loans to repay. Does such a situation contribute to the over indebtedness of microfinance borrowers and increase the cases of default in the microfinance industry?

High repayment rate is a matrix used to ensure successful lending practices of financial institutions, but does it guarantee a happy ending for borrowers? The repayment rate of the microfinance industry should account for who pays a loan. After all, the purpose behind the creation of microfinance was poverty alleviation rather than the current weakening of the community relations, financial stability and social capital of borrowers that I witnessed in Kenya.

I argue that when a loan is paid in full, the lender always benefit, but borrowers do not.

A Microfinance Story for those Questioning the NEW Kenyan Consumer Protection Bill

The new Kenyan constitution requires the government to adopt a consumer protection bill into law. At the moment, the draft of the bill is currently under the review of the Commission for the Implementation of the Constitution (CIC). This is exciting news as the consumer protection bill in 2007 failed to be passed by parliament. With the new interest and demand for the bill, here is a story to motivate the Kenyan government to take to heart the millions of consumers in Kenya that are in need of protection through this new bill.
 

Agatha is one of many borrowers discouraged by the practices of microfinance because of the lack of protection for consumers such as herself. Several years ago as a mother of three, Agatha wanted to help support her family by opening a clothing shop as her own business, the dream of many Kenyan women. She explained to me that she finally became a member of a microfinance institution after a referral from a friend in order to gain capital and knowledge to grow her dream. 

After borrowing her second loan, the practices of her microfinance program began to change dramatically starting with 3% increases in interest for each new loan. Her payments on existing loans also began changing as well without any prior explanation or notice from the loan officer she trusted and called teacher.  She began to question if such changes were permitted, but the microfinance institution did not give her a copy of her loan agreement before or after signing it.

With such changes, many of the borrowers in her self-help group began missing loan payments for which the other members became partly responsible for paying, including the accumulating penalty fees charged after a missed loan payment. Agatha herself was barely able to pay her third loan, but only through the help of family and friends.  It was then that she decided to leave the world of microfinance for good. These experiences continue to deter her from borrowing to this day because of the lack of protection of borrowers such as herself and her friends in the self-help group.  

How many more borrowers share Agatha’s experiences? If the Consumer Protection Bill is passed, Agatha’s story, and the story of countless others like her, can be a consumer problem of the past due to several key protections in the new bill. 

First, the Consumer Protection Bill requires lenders to deliver a disclosure statement to every borrower summarizing their credit agreement. (An improvement to the bill: all statements should be offered to clients in any of the official languages of Kenya, not just English.)

Second, within thirty days of increasing the annual interest rate of a loan by 1% or more that results in the increase of a borrower’s loan payment amounts, the lender must submit a new disclosure statement to the borrower stating the changes. 

Third, fees that result from the default of a borrower are limited to responsible charges incurred by the lender in collecting payments and repossessing or protecting the security pledged by the defaulter. 

Fourth, a borrower can pay the full balance of his or her loan at any time without penalty. 

Fifth, lenders can not release or make representations of any credit agreement in any form unless complying with the prescribed requirements set by the bill. Thus, the bill will provide privacy of information for borrowers. 

Although the Consumer Protection Bill should include many more consumer rights, if it is passed, Agatha and other microfinance clients will have something to celebrate during the New Year. Agatha's story shows the potential impact that the bill could make in the lives of microfinance clients. With the expansion of financial based consumer rights in the bill, microfinance clients will be able to access improved financial services that will enhance a long and healthy financial future for all Kenyans.