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Finance and Banking

 

Microfinance: A Synopsis of African Experiences

Empirical evidence shows that there is high demand for microfinance in Africa. Micro-financial services are provided by government (in form of subsidized credit), private organizations, and non-governmental organizations. Microfinance programs launched by Credit Unions, rural banks and NGO projects have realized various degrees of success.

In Zimbabwe, microfinance has been stifled by the economic meltdown resulting from the difficult economic environment: Poverty, hyperinflation, foreign currency shortages, fuel shortages and general commodity.

In Uganda, where the cooperative and rural financial sector had collapsed, commercial banks such as centenary bank are providing financial services to more than 45,000 borrowers and 390,000 savers in both urban and rural areas. In Ethiopia one microfinance institution has 214,000 customers and the so called ‘big four’ MFIs have a combined portfolio of more than $80 million.

Kenya has a micro-financial sector which was developed along the lines of the Grameen Model- the Kenya rural finance Enterprise Programme (K-REP). Based on the Grameen model, the success of the methodology made the concept to spread to other institutions such as the Women Finance Trust, CAREWEDCO and Faulu. Among all these development, the K-rep remains spectacular and calls for a further elaboration:

The Kenya Rural Enterprise Program (K-REP)

The Kenya Rural Enterprise Program (K-REP) was established in 1984 as an intermediary NGO, providing credit for on-lending and technical assistance to other NGOs. To promote growth and generate employment in the micro-enterprise sector, K-REP lends to clients who would otherwise find it extremely difficult to access credit from commercial banks and other formal financial institutions. Its operations are currently concentrated in Nairobi, Nyeri, Eldoret and Embu.

Access and Outreach

After beginning operations in 1984, K-REP experienced limited success using an integrated model of credit delivery. By 1989, the K-REP Board of Directors reduced the number of NGOs under assistance and promoted a minimalist lending program which focused on providing credit without training and technical assistance. However, K-REP has maintained most of its original activities--namely, support to NGOs, research, evaluation, innovation, information dissemination and consultancies--and has added a direct lending program. Increasingly, K-REP focuses on efficient credit delivery and overall sustainability.

Currently, K-REP offers credit directly through group lending and indirectly through other NGOs. Its Juhudi Scheme, initiated in 1989, provides individual loans based on a modification of the group lending methodology used by the Grameen Bank in Bangladesh. K-REP facilitates the formation of five-member groups called watanos. Up to six watanos confederate into a kiwa, which is registered by the Ministry of Culture and Social Services as a self-help group. The Chikola Scheme, initiated in 1991, provides credit to individual entrepreneurs through existing rotating savings and credit associations (ROSCAs). Under the Chikola Scheme, K-REP provides a single loan to an established group (average membership of 20 persons) that retails the loan to its individual members. After a Juhudi group has been in existence for some time, it may seek approval to transform into a Chikola group. Additionally, K-REP maintains a wholesale credit facility for selected NGOs, which on-lend to their clients using the Juhudi methodology. However, K-REP has also combined the Juhudi and Chikola schemes at the area field office levels and separated the administration of sustainable (micro-enterprise lending) and non-financial services.

With the exception of the Nairobi city offices, all area offices serve rural and urban clientele. The operating target for an Area Credit Office is 1,800 clients.

Member savings increased from Ksh 2.4 million in 1991 to Ksh 55.3 million in 1995. The number of active savers went from 2,337 in 1991, to 5,429 in 1993 and 15,014 in 1995, growing most rapidly over the period 1993-1994 when the Chikola Credit Scheme was expanded. Member savings are required in order to borrow from K-REP, and before becoming eligible to borrow, clients are required to save a minimum of 10% of the loan. This has helped to raise the volume of savings deposits as the number of borrowers and loan volume increase.

The K-REP methodology benefits client groups in several ways. Clients expand their businesses and employ more people. Clients are also introduced to the banking system and their productive activity is integrated into the formal financial system. Further, K-REP involves clients in making major decisions, such as loan approvals, and in improving the schemes.

K-Rep is growing from strength to strength. And developed into a group of companies in 2001 and today the bank is going regional. This is a replication from the Grameen model which was adapted to the local (Kenyan) conditions. It is possible for other African countries to “copy-paste –and -adapt” the doable models so as to reach the poor and economically empower them.

Conclusion.

Large marginalised rural populations must be included into the financial mainstream so as to maximise their local economic opportunities. The rural poor have great potential because they are economically active but the greatest hindrance is access to finance. Improved access to financial services has a positive impact since the productive opportunities are available. In case of rural land owners, they have land as one of the factors of production so what is needed is the capital so as to boost their productive capacity. A holistic approach is advocated for in order to realise the fullest potential and benefits.

Subsidised credit is not a sustainable form of assistance for the poor people. Because of low interest rates, the poor are coerced to misdirect the loans. It is generally accepted worldwide that subsidised loans distort the financial deepening efforts of financial services providers. In most cases, government funded loans are cancelled and people develop a culture of loan defaulting. Most African governments cancel loans when they are towards elections so as to buy votes.

There ought to be a  replication of the Grameen model that has been tried in a number of countries. In Bangladesh, the Grameen bank is still thriving which is a sure case that, with proper management, it can also be successful in Africa. However, it is important to take note of the possible required adjustments so as to fit the local environment. The K-Rep case gives hope that this model can be used in all African countries. In Zimbabwe, the Grameen case was also employed by CAP (Credit Against Poverty) as reported by the UNDP (1997).

African government should support the growth of the microfinance industry so as to improve the lives of the poor especially in the rural areas. In most cases, the regulatory framework is repressive and does not allow for flexible operations in the industry. The Grameen case is one that is guided by laws that are different from those followed by traditional banks. The bank is also owned by its borrowers (94.34 %) and the remaining stake (5.66%) is in the hands of Bangladesh government.




By Stephen Mago
Mago is a PHD Student at University of Fort Hare, South Africa


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