Rural Financial Services in KenyaWhat is working and Why?
-Betty Kibaara-
International Conference on Rural Finance ResearchMoving Results into Policy and Practice
FAO HeadquartersRome, Italy
19-21 March, 2007
Egerton University-Kenya
Theme: Improvement in operational Management of Rural Finance Institutions
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Rural Financial Services in Kenya Formal organized commercial banks concentrated in the urban areas- in
1990’s most multinational banks closed rural branches
An array of informal financial systems created to fill the vacuum
Only 20% of the population have access to bank accounts in the rural areas.
Rural finance has been recognized and fast tracked under the Strategy for Revitalizing Agriculture
It is against this background that we conducted a research on selected rural finance models
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Table 3: Source of agricultural credit, 2000 and 2004
PercentMarket Share
Source of credit 2000 2004
AFC 0.4 1.3
Commercial bank 0.6 1.0
Cooperative 26.0 20.6
Private company 53.5 62.7
Local trader 6.8 3.9
MFI/ NGO 0.6 0.5
Informal money lender 12.1 9.9
100.0 100.0
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Presentation Outline State Owned/Government Model Community Owned Model
Village Banks Mbeu Savings Association ‘Bank under a tree’
Donor Credit Guarantee Agricultural Input Stockists Credit Input Supply Voucher System
Emerging Indigenous Banking Model Beach Banking
Objective understand the operations, constraints, opportunities and possibility of replication
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State Owned/Government Led Model: - Agricultural Finance Corporation-
Semi-government organization- budgetary allocation
Targets large scale farmers
Collapsed in the 1990’s and revamped in 2003
Offers, seasonal, developmental loans, value addition loans, and short term loans to agricultural input stockists
Challenge:-Loan Recovery, inefficiencies and financial sustainabilityOpportunity to diversify from retail to Groups/Wholesale lending
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Donor Credit Guarantee Model -Agricultural Input Stockist-
Model involves the Donor, an NGO, an input stockists and input Manufacturer.
Strengthen the creditworthiness of the agricultural input stockists who lack capital.
NGO trains the stockists and link them up with manufacturers/distributors of inputs-get inputs on credit
Donor guarantees to pay 50% of defaulted credit
Challenge: limited guarantee -$40,000
Scaling up: The model has attracted the Agricultural Finance Corporation Now lending short term credit ( Ksh. 150,000 to Ksh.500,000)
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Donor Guarantee -Credit Input Supply Voucher System-
Provision of agricultural inputs using vouchers reduce diversion- in Ahero Rice Irrigation Scheme
Involves a donor guarantor, an MFI, Savings and Credit Co-operatives (SACCO), Input stockists, Government and the private sector
In 2005, disbursed Ksh. 6.7 million 600 farmers
Challenge: cohesiveness of all actors in the value chainOpportunity exist for scaling up to other irrigation schemeReplication: Already replicated in Bunyala Rice Irrigation Scheme
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Emerging Indigenous Banking Model -Equity Bank-
Bank owned by locals
Principal- take banking services closer to the people after the multinational banks pulled away from the rural areas- FIXED and MOBILE BANKS
Rural clients account for 68% of clients
Low transaction charges –No ledger fee, take digital photo.
Total clients -1 million ( over 20% of all the total deposit accounts in Kenya)
Borrowing clients, 21%
Challenges : Infrastructure, insecurity
Replication: a number of banks have have set up rural branches e.g. Family Finance, Barclays bank and Kenya Commercial banks
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Community Owned Model Financial Service Association ‘Village Banks’
Owned by the local community- membership through shares Low densely populated areas Managed by management companies- Krep Development
Agency at a fee Donor assistance with a clear exit strategy- Institutionalization
and capacity building 70 village banks, 70,000 savers, Ksh. 82 million shareholding Proportion of client obtaining loan, 38%
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Community Owned Models -Mbeu Savings Association- ‘Bank under the tree’
Owned by the local community- membership through shares
Low densely populated areas-promoted by the church One Management office in the city 4-5 credit officers - use Motor bikes to visit the
groups Offers savings, loans and money transfer 10,000 members, Ksh 30 million savings % borrowing clients, 30%
Challenge: Insecurity, poor road infrastructure, regulatory issues
Replication: other NGOs promoting the model
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Beach Banking Model
The model serves the unbanked fishermen along Lake Victoria beaches
Members formed a savings and credit Co-operative (SACCO), an MFI oversees its management.
8 service points ‘bank’ along the lake- Savings and loan facility Only 30% of the members borrow Most innovative product are the Market Day Loans as low as US $ 3
Challenge: Migratory nature of fishermen, insecurity, regulatory
Opportunity: so far only serving 3,000 fishermen….potential 12,000
Replication: piloting along the coastal region
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A Comparative Analysis of the Rural Finance Models
IndicatorState
Owned
Emerging Indigenous
BankVillage Banks
Mbeu Savings
Credit Voucher System
Beach Banks
Interest Rates 10% 12- 18% 20 - 34% 12% 24% 24%
Clients (No.) 5,200 380,800 70,000 7,400 617 3,000
Per capital income in US $ / day 1.4 1.2 0.8 0.7 0.5 0.6
Ave. loans per client 320,000 42,942 7,215 10,000 10,000 18,153
Insurance on loans No Yes Yes Yes Yes Yes
% borrowers - 21% 38% 30% - 30%
Cost of lending 1 Ksh 0.5 0.22 0.13 0.08 0.09 0.02
Av. Savings per client N/A 16,071 19,000 4,077 3,635 5,797
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Govt. led model:AFC
Financial Sustainability HighLow
Low
High
Community owned models
Village banks and Mbeu savings
Ou
trea
ch (
no.
of
clie
nts)
Credit input Supply Voucher System
Private commercial bank -Emerging indigenous banks-
Current ScenarioOutreach (no. of clients) and Financial Sustainability
Beach banking
Sustainability frontier
Outreach frontier
14 Financial Sustainability HighLow
Low
HighCommunity owned
modelsFSA and Mbeu savings
Ou
trea
ch (
no.
of
clie
nts)
Private commercial bank-Emerging indigenous banks-
Future ScenarioOutreach (no. of clients) and Financial Sustainability
Outreach frontier
Govt. led model:AFC
Govt. led model:Future AFC
Group lending
???
Beach banking
Credit input Supply Voucher System
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Policy Implication The government policy of the state financing is unsustainable in the
long run. In addition, the state owned financing institution focus only on credit aspect.
Rural finance policy in most cases have addressed the issue of credit but lack of a savings facility is a bigger constraint than credit. Rural finance policy should be comprehensive.
Policy or intervention targeting only a single activity in the value chain such as supply of credit may have limited impact as compared to an intervention that target the whole value chain.
Policy interventions aimed at promoting the community owned models are likely to be successful and have greater impact.
Government should promote infrastructure to enable the private sector such as banks to penetrate the rural areas