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Kenya@60: How the microfinance movement has shaped the economy
The success of microfinance in Kenya can be largely attributed to the deep-rooted Harambee spirit, which is an integral part of our social fabric. FILE PHOTO | SHUTTERSTOCK
Before the financial system in Kenya was formalised, the microfinance system had taken shape and was thriving through informal channels in the country.
While formal finance channels and regulators such as the Central Bank of Kenya (CBK) were created some years after Independence, Kenyans had become financially savvy largely through member-based entities such as savings and credit association cooperatives, rotating savings and credit associations and money lenders.
Sixty years ago, despite the absence of formally registered financial organisations, the chamas (small savings and investment groups) and shopkeepers were offering much-needed financial access, particularly in rural areas.
The sense of communal collaboration that is thriving has been seen as the driver of the microfinance movement over the years.
“The success of microfinance in Kenya can be largely attributed to the deep-rooted Harambee spirit, which is an integral part of our social fabric," Edgar Andangalu, the CEO at Viffa Consult, an MSME consultancy, told Business Daily.
"This spirit fosters a sense of community and collaboration, driving initiatives such as table banking, chamas and saccos. These financial models enable homogenous communities to come together, pooling funds for investment, and emergencies, and providing loans to one another,” Mr Andangalu said.
The impact of the microfinance movement can be felt today in the elimination of barriers, promotion of financial inclusion and addressing the unique needs of rural communities, he explained.
“Microfinance’s foundation lies in group lending, which naturally promotes inclusivity within communities. To access loans, individuals understand the need to recruit friends and relatives into the microfinance network, fostering wider participation in financial services. Consequently, upon the launch of microfinance programmes in a community, there is often a rapid growth in membership, reflecting the demand for accessible and inclusive financial solutions,” he added.
Some of the mature and formalised microfinance institutions have their formative years in this very movement.
For instance, the Small and Microenterprises Programme Deposit Taking Microfinance Limited (SMEP DTM) began in 1975 as a project of the National Council of Churches of Kenya (NCCK) and provided the poor in slum areas with food and later gave grants to small businesses.
SMEP grew to a fully-fledged financial services provider, first evolving into a micro-credit company registered in 1999 and to a Central Bank of Kenya-licensed microfinance institution in 2011.
Formal microfinance channels are featured hand in hand with larger financing arms such as banks and include the microfinance industry and saccos while informal channels include the rotating savings and credit associations, chamas, shopkeepers and money lenders.
The CBK has previously acknowledged the role of the formative finance channels in its assessment of the country’s financial system stability.
“Kenya’s financial system is dualistic in nature, made up of both formal and informal sectors,” the CBK observed in a note dated March 2013.
Today, the microfinance movement has disrupted itself to stay relevant by leveraging the emergence of new technologies.
While microfinance entities may not be necessarily referred to as fintech, the entities have taken advantage of the advancement in technologies to offer their products and services through digital channels.
The advent of mobile money services in 2007 through which other microfinance operators embed their services has, for instance, driven down financial exclusion.
According to data from the 2021 FinAccess Survey Report, financial exclusion has slumped from 41.3 percent in 2006 to 11.6 percent in 2021.
Informal channels
This is so while overall financial access has risen to 88.4 percent from 58.8 percent over the period.
More than 81 percent of adults use mobile money accounts to access financial services even as the use of other informal channels such as chamas whose use stood at 30.1 percent in 2021.
“The use of mobile money services dominates across counties, with counties in the arid or marginalised areas being highly dependent on this provider.
The rapidly evolving financial technologies continue to impact how people conduct their transactions across all socio-economic activities,” reads the 2021 FinAccess Survey.
