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Rural Financial Services in Kenya
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Rural Financial Services in Kenya



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  • 1. International Conference on Rural Finance Research Moving Results into Policy and Practice FAO Headquarters Rome, Italy 19-21 March, 2007 Rural Financial Services in Kenya What is working and Why? -Betty Kibaara- 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 100.0 100.0   9.9 12.1 Informal money lender 0.5 0.6 MFI/ NGO 3.9 6.8 Local trader 62.7 53.5 Private company 20.6 26.0 Cooperative 1.0 0.6 Commercial bank 1.3 0.4 AFC 2004 2000 Source of credit Percent Market Share
  • 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 5,797 3,635 4,077 19,000 16,071 N/A Av. Savings per client 0.02 0.09 0.08 0.13 0.22 0.5 Cost of lending 1 Ksh 30% - 30% 38% 21% - % borrowers Yes Yes Yes Yes Yes No Insurance on loans 18,153 10,000 10,000 7,215 42,942 320,000 Ave. loans per client 0.6 0.5 0.7 0.8 1.2 1.4 Per capital income in US $ / day 3,000 617 7,400 70,000 380,800 5,200 Clients (No.) 24% 24% 12% 20 - 34% 12- 18% 10% Interest Rates Beach Banks Credit Voucher System Mbeu Savings Village Banks Emerging Indigenous Bank State Owned Indicator
  • 13. Current Scenario Outreach (no. of clients) and Financial Sustainability Govt. led model: AFC Financial Sustainability High Low Low High Community owned models Village banks and Mbeu savings Outreach ( no. of clients) Credit input Supply Voucher System Private commercial bank -Emerging indigenous banks- Beach banking Sustainability frontier Outreach frontier
  • 14. Future Scenario Outreach (no. of clients) and Financial Sustainability Financial Sustainability High Low Low High Community owned models FSA and Mbeu savings Outreach ( no. of clients) Private commercial bank -Emerging indigenous banks- 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