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Microfinance in Northern Kenya: the experience of K-Rep Development Agency (KDA) Presented by: Sharon Osterloh, Masters Candidate Cornell University.

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Presentation on theme: "Microfinance in Northern Kenya: the experience of K-Rep Development Agency (KDA) Presented by: Sharon Osterloh, Masters Candidate Cornell University."— Presentation transcript:

1 Microfinance in Northern Kenya: the experience of K-Rep Development Agency (KDA) Presented by: Sharon Osterloh, Masters Candidate Cornell University

2 WHAT IS MICROFINANCE? “Microfinance refers to small-scale financial services for both credit and deposits - that are provided to people who farm, fish or herd; operate small or microenterprises where goods are produced, recycled, repaired or traded; provide services; work for wages or commissions; gain incomes from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries, in both rural and urban areas.” Marguerite Robinson, Strategic Issues in Microfinance, 1998, pp.55-56

3 HISTORY OF MICROFINANCE Credit union movement, 19th C Germany Microfinance movement begins in 1976 Professor Yunus’ experimentation lead to the initiation of the Grameen Bank in 1983 K-Rep started in 1984 Microfinance does not satisfy an existing market. Demand for microfinance services emerges after creating institutions to provide such services

4 MICROFINANCE IN KENYA Cooperative model Village banks Linkage model Microbanks Grameen Bank model Financial Services Association (FSA) K-Rep Development Agency (KDA)

5 Source: Ahmed Jazayeri, "Journal of Small Enterprise", 1996. FSA CONCEPTS Owned and operated by the local inhabitants, FSAs mobilize financial resources of the area for investment back into the locality FSAs are locally accessible, locally owned, and locally operated financial institutions FSAs capitalize on informal local rules, customs, relationships, knowledge, and solidarity, while introducing formal banking concepts and methods

6 KDA’S FSA MODEL FSA shares are sold at 300kshs per share The share capital constitutes the loan fund Members can apply for loans up to 4x the value of their shares, not to exceed 10% of total share capital Members can open savings accounts and save up to 10x the value of their shares Members elect board of directors and committees Members decide whether to reinvest profits or to distribute profits in proportion to shareholdings

7 KDA’S ROLE IN THE FSA MODEL KDA provides a strongbox, building subsidy, bookkeeping materials, training, and ongoing technical support KDA also provides yearly external audits in accordance with internationally accepted accounting practices KDA does NOT contribute to the loan fund nor does it share any profits of the FSAs

8 *except Marsabit, Source: FSA Monthly Monitoring Report, Jan 01

9 SUMMARY STATISTICS

10 FSA PREMISES I Local ownership encourages good stewardship of share capital, enabling long- term FSA self-sufficiency II FSAs provide opportunities to relax the capital constraints preventing entrepreneurs from exploiting lucrative business opportunities IIIPoor people want to save money and FSAs provide secure, convenient repositories

11 ISelf-Sufficiency Of the four FSAs in Marsabit District in operation for over one year, only one was operating at a profit FSAShare Value% Gain/(Loss) Gabra Scheme152, in Mar 01(49%) Badha Huri264, in Jun 00(12%) Korr71, in Nov 00(76%) North Horr312, in Jun 00 4%

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14 ISelf-Sufficiency Local ownership is not a sufficient condition to good stewardship FSAs have not attained self-sufficiency HYPOTHESIS I:The closer FSA operations mirror the FSA model, the closer the FSA arrives to the goal of self-sufficiency

15 II Lucrative Business Opportunities Most loans are too small to capitalize on spatial price differentials Mean FSA loan4,844 Median 2,400 Mode1,200 42% of loans distributed are intended for consumption purposes

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18 II Lucrative Business Opportunities Loans intended for productive and consumption purposes yield nearly identical default rates HYPOTHESIS II: Business opportunities in the pastoral environment are not profitable enough to support the necessarily high interest rate of an FSA loan

19 IIISavings Within the five FSAs with a combined membership of 925, 48 savings accounts have been opened Of the 48 savings accounts, only one is active (Chief’s Office, North Horr) Of the 48 savings accounts, only 13 have more than two transactions

20 FSA Savings

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23 IIISavings Demand for expensive loans is higher than that for inexpensive savings Pastoralists save in the form of livestock, and have not taken advantage of the opportunity to convert asset wealth into FSA savings HYPOTHESIS III: A latent demand for cash savings services exists

24 Microfinance Popularity Self-sufficiency Low default rate Financial services offer opportunities for empowerment through economic development Local democratic institution building High participation by the local community (especially the poor)

25 FSA Participation

26 Of the 925 combined members, 300 took 553 loans 46% of the 300 borrowers hold delinquent balances Only one in three members have ever used savings or loan services offered by the FSA

27 The Road Ahead Train board members, management, and shareholder to bolster FSA capacity Research pastoralists’ behavior and redesign FSA service packaging Experiment with different management schemes to provide performance incentives Equip members with business skills Complement FSAs with other components of risk management, i.e. income generation

28 Risk Management Synergy To enable FSAs to realise their potential as financial mediators, synergy between risk management components must be captured Livestock marketing Training

29 Microfinance in Northern Kenya: the experience of K-Rep Development Agency (KDA) Presented by: Sharon Osterloh, Masters Candidate Cornell University


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