Microfinance in Northern Kenya: the experience of Kenya Rural Enterprise Program KREP

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Microfinance in Northern Kenyathe experience
of Kenya Rural Enterprise Program (KREP)

• Presented By
• Sharon Osterloh, Masters Candidate
• Cornell University

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WHAT IS MICROFINANCE?

• Microfinance refers to financial services such as
  cash loans, money transfers, direct deposits,
  savings, and insurance made accessible
  (primarily) to the rural poor.
• The term "micro" is used because the transactions
  are on a smaller scale that one finds in urban
  areas.

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MICROFINANCE IN KENYA

• Grameen Bank
• Pride Africa
• Kenya Womens Finance Trust
• Financial Services Association (FSA)
• Kenya Rural Enterprise Program (KREP)

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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

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KREPS 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

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KREPS ROLE IN THE FSA MODEL

• KREP provides a strongbox, building subsidy,
  bookkeeping materials, training, and ongoing
  technical support
• KREP also provides yearly audits in accordance
  with internationally accepted accounting
  practices
• KREP does NOT contribute to the loan fund nor
  does it share any profits of the FSAs

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SUMMARY STATISTICS
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FSA PREMISES

• I Local ownership encourages good
  stewardship and enables self-sufficiency
• II FSA loans relax capital constraints which
  prevent village entrepreneurs from exploiting
  lucrative business opportunities
• III Poor people want to save money

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I Self-Sufficiency

• Of the five FSAs in Marsabit District, not one
  is operating at a profit.
• FSA Share Value Loss
• Gabra Scheme
• Badha Huri
• Kalacha
• Korr
• North Horr

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I Self-Sufficiency

• Local ownership is not a sufficient condition to
  good stewardship
• FSAs are not self-sufficient
• HYPOTHESIS I The closer FSA operations mirror
  the FSA model, the closer the FSA arrives to the
  goal of self-sufficiency

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II Lucrative Business Opportunities

• Most loans are too small to capitalize on spatial
  price differentials
• Mean FSA loan 4,844 Median 2,400
  Mode 1,200
• 42 of loans distributed are intended for
  consumption purposes

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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

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MICROFINANCE INTEREST RATES

• High interest (10 interest per month on a
  reducing balance) is necessary due to
• High risk of default
• Low supply of and high demand for capital
• Expectation of self-sustainability

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III Savings

• 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
  (Chiefs Office, North Horr)
• Of the 48 savings accounts, only 13 have more
  than two transactions

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FSA SAVINGS
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III Savings

• 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

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MICROFINANCE POPULARITY

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

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FSA PARTICIPATION
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FSA PARTICIPATION

• 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

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Microfinance in Northern Kenyathe experience
of Kenya Rural Enterprise Program (KREP)

• Presented By
• Sharon Osterloh, Masters Candidate
• Cornell University