Countries & Regions

Microfinance and the Financial Services Sector

The Kenyan financial sector is one of the broadest and most developed in sub-Saharan Africa (SSA), with 45 financial institutions, including 43 commercial banks and 2 mortgage finance companies. These banks, along with the Kenya Post Office Savings Bank, make up Kenya’s formal banking sector and serve 22.6 percent of Kenya’s adult population, according to survey results published in early 2009. Non-bank financial institutions, including microfinance institutions (MFIs), savings and credit cooperatives, and mobile phone service providers serve another 17.9 percent of the population, bringing the total served by formal financial services to 40.5 percent. Another 26.8 percent of Kenyans rely on the informal financial sector, including NGOs, self-help groups, and individual unlicensed money lenders, and 32.7 percent of the population does not use any form of financial services.

Given the shallow reach of traditional forms of banking, microfinance has played a central role in the evolution of Kenyan financial services. Four of Kenya’s major commercial banks have roots in microfinance: two as building societies (Family Bank and Equity Bank), one as an NGO (K-REP), and another as a cooperative society (Co-operative Bank). These commercial banks, along with a wide variety of registered microfinance institutions, savings and credit cooperatives, and NGOs, make up Kenya’s microfinance industry. The Central Bank reports that as of December 2008, the 36 retail MFIs (excluding commercial banks) registered with the Association of Microfinance Institutions (AMFI) had 1.44 million active deposit accounts/clients at their 825 branch offices, an increase of over 400,000 from the previous year. Excluding commercial banks, the value of total deposits was 202 million USD, up from 151 million USD the previous year. These institutions had 1.27 million active loan clients in aggregate at the end of 2008, an increase of over 30 percent from the previous year, and a total of 443 million USD in gross loan portfolio.

In addition to traditional forms of microfinance, mobile banking has rapidly expanded access to financial services in Kenya since Safaricom, the Kenyan affiliate of global mobile telecommunications provider Vodaphone, launched its M-PESA service in March 2007. M-PESA allows customers to access an electronic payment and store of value system through their mobile phone, and offers cash deposit and withdrawal access at 16,900 Safaricom outlets throughout Kenya, nearly half of which are located outside of urban centers. After achieving extraordinary growth since its inception, by January 2010 M-PESA had 9 million customers, accounting for approximately 40 percent of Kenya’s adult population, the majority of whom were active users of the system. In May 2010, Safaricom and Equity Bank announced a partnership to allow M-PESA customers to open a new Equity Bank “M-KESHO” savings account which they will be able to access through their mobile phones.

The Kenyan government and Central Bank have prioritized expanding access to financial services as part of their plans to modernize the economy, a process slowed by challenges in recovering from the global recession, a prolonged drought, and political instabilities following the disputed 2007-2008 elections. In response to this sluggish growth, the government has embarked on aggressive fiscal stimulus and eased monetary policies, cutting the Central Bank rate steadily through late 2009 and early 2010. As of May 2010, much of Kenya’s success rests on the stability of a coalition government resulting from the disputed election. In April 2010 the Kenyan parliament approved a new draft constitution to strengthen checks and balances, though most of the reforms will not be implemented until after the next election in 2012.

Infrastructure

The Central Bank of Kenya regulates and supervises the 43 licensed commercial banks which form the bulk of Kenya’s formal private financial sector. Though only four commercial banks currently engage in microfinance, the Central Bank expects this number to rise as the microfinance and banking industries grow.

In an effort to encourage the growth of the microfinance industry outside of the commercial bank sector, the government of Kenya issued new regulations governing MFIs in 2006, and further revised these articles in 2008. The Microfinance Act of 2006 established a new regulatory category for deposit-taking MFIs on which it imposed licensing and transparency requirements, deposit protections, dissolution mechanisms, corporate governance, performance, and accounting standards, and supervision by the Central Bank. The 2008 revisions to the 2006 Act relaxed some of these requirements for smaller MFIs operating in limited geographic regions by dividing deposit-taking MFIs into two categories: “community microfinance institutions” and “nationwide microfinance institutions.” MFIs operating on a community basis can apply to become nationwide MFIs, though nationwide MFIs are not able to convert to the community status, which has looser capital requirements. Only two institutions – Faulu and KWFT – are currently licensed as deposit-taking MFIs, though as of the end of 2009, over 30 more institutions had passed the first stage of approval.

As of May 2010, non-deposit-taking microfinance institutions do not fall under the jurisdiction of the Central Bank’s microfinance regulations, and as such they fall under either the SACCO category supervised by the SACCO Societies Regulatory Authority (SASRA), or the informal microfinance category, which is unregulated except for the licensing required of all NGOs in Kenya. The Central Bank is currently consulting with a variety of industry stakeholders to determine the best practices for incorporating non-deposit-taking MFIs into their regulatory framework.