Rural Financial Services in Kenya What is working and Why? -Betty Kibaara- International Conference on Rural Finance Research Moving Results into Policy and Practice FAO Headquarters Rome, Italy March, 2007 Egerton University-Kenya Theme: Improvement in operational Management of Rural Finance Institutions

2 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

3 Table 3: Source of agricultural credit, 2000 and 2004 Percent Market Share Source of credit AFC Commercial bank Cooperative Private company Local trader MFI/ NGO Informal money lender

4 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

5 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 sustainability Opportunity to diversify from retail to Groups/Wholesale lending

6 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)

7 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 chain Opportunity exist for scaling up to other irrigation scheme Replication: Already replicated in Bunyala Rice Irrigation Scheme

8 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

9 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%

10 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

11 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

12 A Comparative Analysis of the Rural Finance Models Indicator State Owned Emerging Indigenous Bank Village Banks Mbeu Savings Credit Voucher System Beach Banks Interest Rates10%12- 18% %12%24% Clients (No.)5,200380,80070,0007, ,000 Per capital income in US $ / day Ave. loans per client320,00042,9427,21510,000 18,15 3 Insurance on loansNoYes % borrowers-21%38%30%- Cost of lending 1 Ksh Av. Savings per clientN/A16,07119,0004,0773,635 5,797

13 Govt. led model: AFC Financial SustainabilityHighLow High Community owned models Village banks and Mbeu savings Outreach ( no. of clients)Credit input Supply Voucher System Private commercial bank -Emerging indigenous banks- Current Scenario Outreach (no. of clients) and Financial Sustainability Beach banking Sustainability frontier Outreach frontier

14 Financial Sustainability High Low High Community owned models FSA and Mbeu savings Outreach ( no. of clients) Private commercial bank -Emerging indigenous banks- Future Scenario Outreach (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

15 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