Kenya Microfinance Study Tour Report

KENYA MICROFINANCE STUDY TOUR REPORT

REPORT ON THE KENYA MICROFINANCE STUDY TOUR JUNE 2019

K O AN F Z B IM E B

V A

R B

TABLE OF CONTENTS

1. Introduction……………………………………………………..3 2. Objectives Of The Study Tour …………………………………3 3. Approached Depployed……………………………………….. 3 4. Detailed Findings …………………………………………...... 4 4.1 Kenya Country Profile………………………………………….6 4.2 Overview Of The Financial Sector…………………………...... 6 4.3 Overview Of The Microfinance Sector…...... 8 4.4 Microfinance Legal And Regulatory Framework…...... 13 4.5 Status Of The Mirofinance Sector In Kenya……………...... 14 4.6 Microfinance Product Offering……...... 15 4.7 Challenges Of The Microfinance Sector…...... 16 5 Key Takeaways From The Study Tour……...... 19 6 Recommendations.,…………………………………………....27 7 Action Plan……………………………………………………28 1. INTRODUCTION

*OREDOO\PLFUR¿QDQFHKDVEHHQLGHQWL¿HGDVDQLPSRUWDQWHPSRZHUPHQWVWUDWHJ\IRU WKHSRRUDQGORZLQFRPHKRXVHKROGV0LFUR¿QDQFHWKURXJKIDFLOLWDWLQJEURDGEDVHG DQGLQFOXVLYHDFFHVVWR¿QDQFHLVDNH\HQDEOHULQDGGUHVVLQJEURDGHU8QLWHG1DWLRQV¶ 6XVWDLQDEOH'HYHORSPHQW*RDOV 6'*V =LPEDEZHVLJQHGXSWRWKH6'*VDQG¿QDQFLDOLQFOXVLRQKDVEHHQLGHQWL¿HGDV DNH\HQDEOHUWRWKHDWWDLQPHQWRIPRVWRIWKH6'*V 7KH=LPEDEZH1DWLRQDO)LQDQFLDO,QFOXVLRQ6WUDWHJ\ 1),6 ODXQFKHGLQ LGHQWL¿HVPLFUR¿QDQFHDVRQHRIWKHSLOODUVRIWKH¿QDQFLDOLQFOXVLRQVWUDWHJ\E\ YLUWXHRILWVDELOLW\WRUHDFKRXWWRODUJHUQXPEHUVRIWKHORZLQFRPHDQGPDUJLQDOLVHG FRPPXQLWLHV ,QDGGLWLRQ=LPEDEZHGHYHORSHGWKH,QWHULP3RYHUW\5HGXFWLRQ6WUDWHJ\3URJUDP ,3563 ZKLFKVHHNVWRSURPRWHDQGDFFHOHUDWHLQFOXVLYHJURZWKDQGSRYHUW\ UHGXFWLRQWKURXJKLPSURYHGSROLFLHVFRQVLVWHQWZLWK=LPEDEZH¶VYLVLRQWR EHFRPHDQ8SSHU0LGGOH,QFRPHHFRQRP\E\ 'HVSLWHEHLQJRQHRIWKHSLOODUVRIWKH1),6WKHPLFUR¿QDQFHVHFWRU¶VFRQWULEXWLRQWR ERWKWKHH[SDQVLRQRI¿QDQFLDOLQFOXVLRQDQGHFRQRPLFJURZWKUHPDLQVVXEGXHG $VDW0DUFKWKHVHFWRU¶VWRWDOORDQSRUWIROLRRIPLOOLRQUHSUHVHQWHG RIWKHWRWDOEDQNLQJVHFWRUORDQSRUWIROLRRIELOOLRQ7KHQXPEHURI SHRSOHDFFHVVLQJPLFUR¿QDQFHORDQVZHUHDJDLQVWWKHHVWLPDWHGRIWKH SRSXODWLRQWKDWDUH¿QDQFLDOO\H[FOXGHG RYHUPLOOLRQSHRSOH 7RWDOGHSRVLWVIRUPLFUR¿QDQFHEDQNVDPRXQWLQJWRPLOOLRQDVDW0DUFK UHSUHVHQWHGRIWRWDOEDQNLQJVHFWRUGHSRVLWVRIELOOLRQ 7KH5HVHUYH%DQNRI=LPEDEZHDVWKHSULPDU\UHJXODWRU\DXWKRULW\IRUPLFUR¿QDQFH LQVWLWXWLRQVRUJDQLVHGDPLFUR¿QDQFHVWXG\WRXUWR.HQ\DWRIDFLOLWDWHLQIRUPDWLRQ JDWKHULQJIRUWKHGHYHORSPHQWRIDQDWLRQDOPLFUR¿QDQFHVWUDWHJ\ 7KHVWXG\WRXUWHDPFRPSULVHGR൶FLDOVIURPWKH5HVHUYH%DQNRI=LPEDEZH R൶FLDOVIURPWKH=LPEDEZH$VVRFLDWLRQRI0LFUR¿QDQFH,QVWLWXWLRQV =$0), DQG VHQLRUH[HFXWLYHVLQWKHPLFUR¿QDQFHLQGXVWU\DVLQGLFDWHGLQ$QQH[XUH .HQ\DZDVLGHQWL¿HGDVWKHKRVWFRXQWU\IRUWKHVWXG\WRXUIROORZLQJH[WHQVLYHGHVN UHVHDUFKRQFRXQWULHVZLWKPLFUR¿QDQFHVXFFHVVVWRULHVZLWKLQWKHUHJLRQ.HQ\DLV FRQVLGHUHGDVKDYLQJWKHPRVWYLEUDQWPLFUR¿QDQFHVHFWRULQ6XE6DKDUDQ$IULFD

2 ERWKLQWHUPVRIGLYHUVLW\RILQVWLWXWLRQDOIRUPVEUDQFKQHWZRUNDQGGLYHUVLW\RI PLFUR¿QDQFHGHOLYHU\FKDQQHOV 0LFUR¿QDQFHVXFFHVVVWRULHVLQ.HQ\DDVZHOODVWKHFRQWULEXWLRQRIPLFUR¿QDQFHWRERWK VRFLDODQGHFRQRPLFLQFOXVLRQKDYHPDGHWKHLQGXVWU\DQLFRQLQWKHFRXQWU\CVHFRQRP\ KHQFHNHHQLQWHUHVWIURPWKH.HQ\DQJRYHUQPHQWDQGLQWHUQDWLRQDOLQYHVWRUV 7KHGHWDLOVRIWKHLQVWLWXWLRQVDQGRUJDQLVDWLRQVYLVLWHGE\WKHWHDPDUHVKRZQLQ$QQH[,,

2 OBJECTIVES OF THE STUDY TOUR

7KHRYHUDOOREMHFWLYHRIWKHVWXG\WRXUZDVWRLQIRUPWKHIRUPXODWLRQRID0LFUR¿QDQFH 'HYHORSPHQW6WUDWHJ\IRU=LPEDEZHZKRVHORQJWHUPJRDOLVWKHGHYHORSPHQWRIWKH PLFUR¿QDQFHVHFWRUDQGVWUHQJWKHQLQJRIWKHDQFKRUVWDWXVRIWKHVHFWRUZLWKLQWKH 1DWLRQDO)LQDQFLDO,QFOXVLRQ6WUDWHJ\ $FFRUGLQJO\WKHVSHFL¿FREMHFWLYHVRIWKHVWXG\WRXUZHUHWR D IDFLOLWDWHNQRZOHGJHDQGH[SHULHQFHH[FKDQJHRQPLFUR¿QDQFHUHJXODWLRQ E IDFLOLWDWHFROODERUDWLYHOHDUQLQJNQRZOHGJHDQGLQIRUPDWLRQVKDULQJZLWK.HQ\DQ LQVWLWXWLRQVWKDWKDYHVXFFHVVVWRULHVLQPLFUR¿QDQFHDQG F IDFLOLWDWHOHDUQLQJIURPPLFUR¿QDQFHSROLF\LQWHUYHQWLRQVLQ.HQ\DWRIDFLOLWDWHWKH GHYHORSPHQWRIDFRPSUHKHQVLYHPLFUR¿QDQFHGHYHORSPHQWVWUDWHJ\IRU=LPED bwe.

3 APPROACHES DEPLOYED

7KHVWXG\WRXUHPSOR\HGWKHIROORZLQJSURFHVVHV H[WHQVLYHGHVNWRSDQGOLWHUDWXUHUHYLHZSULRUWRWKHVWXG\WRXUZKLFKLQWXUQ LQIRUPHGWKH VHOHFWLRQRIWKH5HSXEOLFRI.HQ\DDVWKHIRFXVFRXQWU\IRUWKHVWXG\WRXU SUHSDUDWLRQRITXHVWLRQQDLUHVWRSURYLGHJXLGDQFHWRWKHVDPSOHGLQVWLWXWLRQVLQWKH SUHSDUDWLRQRISUHVHQWDWLRQVIRUWKHVWXG\WRXUWHDPDQG FRQGXFWLQJPHHWLQJVDQGLQWHUYLHZVZLWKVHQLRUPDQDJHPHQWWHDPVRIWKHVDPSOHG institutions.

3 0LFUR¿QDQFH7RXU7HDPDQG)DXOX0LFUR¿QDQFH%DQN

4 DETAIL FINDINGS

4.1 KENYA COUNTRY PROFILE .HQ\DLVFRQVLGHUHGRQHRIWKHIDVWHVWJURZLQJHFRQRPLHVLQ6XE6DKDUDQ$IULFDZLWK JURZWKUDWHRILQ$VXPPDU\RIVHOHFWHGNH\HFRQRPLFLQGLFDWRUVLVVKRZQLQ the table below.

,QGLFDWRU /HYHO

7RWDO$UHD NP

6L]HRI3RSXODWLRQ PLOOLRQ

5HDO*URVV'RPHVWLF3URGXFW *'3 86'ELOOLRQ 5HDO*'3SHUFDSLWD 86'

5HDO*'3JURZWKUDWH $QQXDO,QÀDWLRQUDWH 0D\

([FKDQJH5DWH .VKV86' WLPH RIVWXG\WRXU Source: &HQWUDO%DQNRI.HQ\DZHEVLWH

4 KENYA )DVWHVWJURZLQJHFRQRPLHVLQ6XE6DKDUDQ$IULFDZLWKJURZWKUDWHRI 5.7% in 2018

7KH5HSXEOLFRI.HQ\DLVLQLWVWK\HDURIWKHLPSOHPHQWDWLRQRI.HQ\D9LVLRQ ZKLFKZDVODXQFKHGLQ7KH.HQ\D9LVLRQLVWKHFRXQWU\¶VORQJWHUP GHYHORSPHQWEOXHSULQWWRFUHDWHDJOREDOO\FRPSHWLWLYHDQGSURVSHURXVQDWLRQZLWKDKLJK TXDOLW\RIOLIHE\7KHEOXHSULQWDLPVWRWUDQVIRUP.HQ\DLQWRDQHZO\LQGXVWULDOL]HG PLGGOHLQFRPHFRXQWU\SURYLGLQJDKLJKTXDOLW\RIOLIHWRDOOLWVFLWL]HQVE\LQDFOHDQ DQGVHFXUHHQYLURQPHQW9LVLRQSURYLGHVVSHFL¿FJXLGHOLQHVRQWKHDFWLYLWLHVWREH SHUIRUPHGE\WKHYDULRXVSOD\HUVWRJXDUDQWHHTXDOLW\OLIHRIFLWL]HQV $FFRUGLQJWRWKH:RUOG%DQNWKHGHYROXWLRQVWUDWHJ\ZKLFKZDVDGRSWHGDVSDUWRIWKH $XJXVWQHZFRQVWLWXWLRQXVKHUHGLQDQHZSROLWLFDODQGHFRQRPLFJRYHUQDQFH V\VWHPZKLFKKDVSURPRWHGJUHDWHULQYHVWPHQWVDWWKHJUDVVURRWVDQGVWUHQJWKHQHG accountability and public service delivery at district levels. ,QOLQHZLWKWKH9LVLRQWKH¿QDQFLDOVHFWRU¶VRYHUDOOREMHFWLYHVLQFOXGH D ,QFUHDVHGH൶FLHQF\EURDGHQLQJGHHSHQLQJDQGDFFHVVLELOLW\ E ,QFUHDVHGPRELOL]DWLRQRIGHSRVLWVIURP LQ WRRI*'3E\ F (QKDQFHGFKDQQHOOLQJRIVDYLQJVLQWRLQYHVWPHQWIURPWRE\ G (QKDQFHG¿QDQFLDOVHFWRUVWDELOLW\WKURXJKEHWWHURYHUVLJKWDQG H )RVWHULQWHJULW\RIWKH¿QDQFLDOV\VWHP 7KHPLFUR¿QDQFHVHFWRUJRDOVXQGHU9LVLRQLQFOXGH D 'HYHORSLQJH൵HFWLYHUHJXODWRU\IUDPHZRUNV E 6WUHQJWKHQLQJVXSHUYLVRU\FDSDFLW\ F %URDGHQLQJSURGXFWUDQJHDQG 5 G (QFRXUDJLQJVHOIUHJXODWLRQ±FRGHVRIFRQGXFWDQGSHUIRUPDQFHVWDQGDUGV ,QWKLVUHJDUGWKHDFWLYLWLHVRIDOOWKH¿QDQFLDOVHFWRUVWDNHKROGHUVSUDFWLWLRQHUVDQG UHJXODWRU\DXWKRULWLHVDUHJHDUHGWRZDUGVDFKLHYHPHQWRIWKHJRDOVHQVKULQHGLQ9LVLRQ RILQFOXVLYHHFRQRPLFGHYHORSPHQW

29(59,(:2)7+(),1$1&,$/6(&725,1.(1<$

7KHVWUXFWXUHRIWKH.HQ\D¿QDQFLDOVHFWRULVVXPPDULVHGLQWKHGLDJUDPEHORZ 7KH&HQWUDO%DQNRI.HQ\D &%. ZKLFKZDVIRXQGHGLQIROORZLQJWKH GLVVROXWLRQRI(DVW$IULFDQ&XUUHQF\%RDUGLVWKHPRQHWDU\DXWKRULW\DQGSULPDU\ UHJXODWRURIWKHEDQNVDQGPLFUR¿QDQFHEDQNVDVZHOODVRWKHUQRQEDQNLQJ¿QDQFLDO institutions.

Ministry of Finance

Development Financial Institutions Ministry of e.g. KPOSB, AFC,KIE, ICDCI, KTDC Co-op. Devt &Marketing

Central Bank of Capital Markets Retirement Insurance SACCO Societies Authority (1989) Bene ts Authority Regulatory Regulatory Kenya (1966) (1995) Authority (2007) Authority (2009)

Securities Exchanges; Commercial Banks(42); Insurance Co’s ; Sacco Societies with CDSs; Custodians; IBs; RBSs; Pension Mortgage Finance Co’ s Insurance Brokers CISs; IAs; Stock Brokers; schemes; NSSF; Front Oce Service (1); Forex Bureaus (70); FMs; Stock Dealers; Listed Administrators; ; Insurance Agents; Activity (FOSAs) Micro nance Banks Co.s; CRAs and VCFs FMs; Custodians Assessors & MFBs(13); CRBs (3); MRP 19 Adjustors; Health and Rep. Oces(8) Management Co’s

6 0LFUR¿QDQFH7RXU7HDPDW&HQWUDO%DQNRI.HQ\D

$VDW0D\WKHDUFKLWHFWXUHRIWKHEDQNLQJVHFWRURI.HQ\DZDVDVVKRZQLQWKH table below.

Type of Institution Number Commercial Banks 42 Mortgage Finance Company 1 Micro nance Banks 13 Foreign Exchange Bureaus 70 Credit Reference Bureaus 3 Money Remittance Providers 19 Representative Oces of Foreign Banks 8

$OOWKHVHEDQNLQJDQGQRQEDQNLQJ¿QDQFLDOLQVWLWXWLRQVDUHOLFHQVHGVXSHUYLVHGDQG UHJXODWHGE\WKH&HQWUDO%DQNRI.HQ\D 2XWRIWKHEDQNLQJLQVWLWXWLRQVDUHORFDOO\RZQHGWKUHH RIZKLFKDUHSXEOLFO\ RZQHGDQGSULYDWHO\RZQHGDQGDUHIRUHLJQRZQHG7KHIRUHLJQRZQHG¿QDQFLDO LQVWLWXWLRQVFRPSULVH ORFDOO\LQFRUSRUDWHGIRUHLJQEDQNVDQGIRXUEUDQFKHVRIIRUHLJQ LQFRUSRUDWHGEDQNV6RPHPDMRULQWHUQDWLRQDOEDQNVRSHUDWLQJLQ.HQ\DLQFOXGH&LWLEDQN %DUFOD\V%DQN%DQNRI,QGLDDQG6WDQGDUG&KDUWHUHG%DQN 7 4.3 OVERVIEW OF THE MICROFINANCE SECTOR 7KHPLFUR¿QDQFHVHFWRURI.HQ\DLVZHOOGHYHORSHGDQGGLYHUVL¿HGLQFRPSDULVRQ WRWKH=LPEDEZHDQPLFUR¿QDQFHVHFWRU,WFRPSULVHVEDQNLQJLQVWLWXWLRQV PLFUR¿QDQFHGHSRVLWWDNLQJLQVWLWXWLRQVZKLFKKDYHEHHQUHQDPHGµPLFUR¿QDQFH EDQNV¶FUHGLWRQO\PLFUR¿QDQFHLQVWLWXWLRQVVDYLQJVDQGFUHGLWFRRSHUDWLYHVRFLHWLHV 6$&&26 URWDWLQJVDYLQJVDQGFUHGLWDVVRFLDWLRQV 526&$V DQGDFFXPXODWLYH VDYLQJVDQGFUHGLWDVVRFLDWLRQV $6&$V 7KHVHLQVWLWXWLRQVKDYHSURYHGLQVWUXPHQWDO LQH[SDQGLQJ¿QDQFLDOLQFOXVLRQRUDFFHVVWR¿QDQFLDOVHUYLFHVWKURXJKRXW.HQ\D

0LFUR¿QDQFH%DQNV 0)%V $VDW0D\WKHUHZHUHRSHUDWLQJPLFUR¿QDQFHEDQNV 0)%V ZKLFKDUH GLYLGHGLQWRWZRFDWHJRULHVQDPHO\QDWLRQZLGHPLFUR¿QDQFHEDQNVDQG FRPPXQLW\EDVHGRUUHJLRQDOPLFUR¿QDQFHEDQNV 1DWLRQZLGHPLFUR¿QDQFHEDQNVDUHSHUPLWWHGWRRSHUDWHRUHVWDEOLVKEUDQFKHVDQ\ ZKHUHLQWKHFRXQWU\ZKLOHFRPPXQLW\EDVHGPLFUR¿QDQFHEDQNVDUHOLFHQVHGWR operate within a given geographical area or district in the rural areas. There were 11 QDWLRQZLGHPLFUR¿QDQFHEDQNVDQGWZR FRPPXQLW\EDVHGPLFUR¿QDQFHEDQNV

Equity A a Medical Centre- Equity Bank in Partnership with Doctors to Oer Basic Health Care to the underserved

7KH&HQWUDO%DQNRI.HQ\DKDVGLVWLQJXLVKHGPLFUR¿QDQFHEDQNVIURPFRPPHUFLDO EDQNVDFFRUGLQJWRWKHIROORZLQJIHDWXUHV D RIWKH0)%¶VORDQSRUWIROLRVKRXOGFRPSULVHPLFURORDQVHTXLYDOHQWWR RUOHVVWKDQRIWKH0)%¶VFRUHFDSLWDO E 6LQJOHERUURZHUOLPLWRIRI0)%¶VFRUHFDSLWDODJDLQVWIRU FRPPHUFLDOEDQNV F 6LQJOHLQVLGHUERUURZHUOLPLWRIRIFRUHFDSLWDODQGDJJUHJDWHLQVLGHU OHQGLQJOLPLWRIRIFRUHFDSLWDODQG G /RZPLQLPXPFRUHFDSLWDOUHTXLUHPHQW 86'IRUQDWLRQZLGH0)%V DQG86'IRUFRPPXQLW\EDVHG0)%V

8 &UHGLWRQO\PLFUR¿QDQFHLQVWLWXWLRQV $WWKHWLPHRIWKHVWXG\WRXUFUHGLWRQO\PLFUR¿QDQFHLQVWLWXWLRQVLQ.HQ\DZHUHQRW VXEMHFWWRUHJXODWLRQDOWKRXJKVHFWLRQ RIWKH0LFUR¿QDQFH$FWHPSRZHUV WKH0LQLVWHURI)LQDQFHWRVSHFLI\FUHGLWRQO\PLFUR¿QDQFHEXVLQHVVDQGPDNH UHJXODWLRQVSUHVFULELQJPHDVXUHVIRUWKHFRQGXFWRIFUHGLWRQO\PLFUR¿QDQFH EXVLQHVV$WWKHWLPHRIWKHVWXG\WRXUWKH0LQLVWHUKDGLQLWLDWHGWKHGHYHORSPHQWRI QRQSUXGHQWLDOUHJXODWLRQVIRUWKHVXEVHFWRUZKLFKZHUHDWFRQVXOWDWLRQVWDJH

7KH$VVRFLDWLRQRI0LFUR¿QDQFH,QVWLWXWLRQV $0), LVWKHDSH[ERG\IRUWKH PLFUR¿QDQFHVHFWRULQ.HQ\DLQFRUSRUDWLQJWKHPLFUR¿QDQFHEDQNVDQGFUHGLWRQO\ PLFUR¿QDQFHLQVWLWXWLRQV $WWKHWLPHRIWKHVWXG\WRXUZKLOHWKHWRWDOQXPEHURIRSHUDWLQJFUHGLWRQO\PLFUR ¿QDQFHLQVWLWXWLRQVFRXOGQRWEHHVWDEOLVKHGFUHGLWRQO\PLFUR¿QDQFHLQVWLWXWLRQV ZHUHPHPEHUVRI$0),

6DYLQJVDQG&UHGLW&RRSHUDWLYH6RFLHWLHV 6$&&26 7KH6$&&26VXEVHFWRULVDSDUWRIWKH.HQ\DQFRRSHUDWLYHVRFLHWLHVVHFWRUZKLFK FXWVDFURVVDOOVHFWRUVRIWKHHFRQRP\%HVLGHVEHLQJDWRROIRUH[SDQVLRQRI¿QDQFLDO LQFOXVLRQ6$&&26VXSSRUWDJULFXOWXUDOSURGXFWLRQSURFHVVLQJPDUNHWLQJDQG VHUYLFHLQGXVWULHVRIWKH.HQ\DQHFRQRP\7KHWUHPHQGRXVJURZWKRIWKH6$&&26 PRYHPHQWLQ.HQ\DLVODUJHO\DWWULEXWHGWRWKHGHFLVLRQE\FRPPHUFLDOEDQNVLQ WRFORVHDFFRXQWVWKDWKDGDYHUDJHDFFRXQWEDODQFHVRIOHVVWKDQ.VKV 86' $VDW0D\LWZDVHVWLPDWHGWKDWWKHUHZHUHRYHU6$&&26LQ.HQ\D ZLWKDWRWDOPHPEHUVKLSRIPLOOLRQSHRSOH+RZHYHURQO\ZHUHUHJLVWHUHG DQGZHUHFRQVLGHUHGGHSRVLWWDNLQJ6$&&26 '76$&&26 XQGHUWKH

9 UHJXODWLRQRIWKH6$&&26RFLHW\5HJXODWRU\$XWKRULW\ 6$65$ $WRWDORIZHUHPHP EHUVRIWKH.HQ\D8QLRQRI6DYLQJVDQG&UHGLW&RRSHUDWLYHV .86&&2 DQXPEUHOODERG\ of SACCOS in Kenya.

6$65$UHSRUWVWRWKH0LQLVWU\RI&RRSHUDWLYH'HYHORSPHQW 0DUNHWLQJ7KH &RPPLVVLRQHURI&RRSHUDWLYHVLVUHVSRQVLEOHIRUUHJLVWHULQJDQGOLFHQVLQJWKH QRQGHSRVLWWDNLQJ6$&&26XQGHUWKH&RRSHUDWLYH6RFLHWLHV$FW>&KDSWHU@

6$&&2VLQ3DUWQHUVKLSZLWK)LQWHFKV,PSURYLQJ3HRSOH¶VOLYHV 7KH6$&&26LQ.HQ\DDUHGLYLGHGLQWRWZRVHJPHQWVSULQFLSDOO\GL൵HUHQWLDWHGE\ WKHQDWXUHRIVDYLQJVDQGGHSRVLWVWKH\PRELOL]HIURPWKHLUPHPEHUVKLS 7KH¿UVWVHJPHQWLVWKHGHSRVLWWDNLQJ6$&&26 '76$&&2V ZKLFKDUH SHUPLWWHGWRWDNHGHPDQGGHSRVLWVDQGR൵HUZLWKGUDZDEOHVDYLQJVDFFRXQWVVHUYLFHV WRWKHLUPHPEHUV6RPHRIWKHPHPEHUVRIWKLVVHJPHQWUHFHLYHWKHLUVDODULHVGLUHFWO\ into their SACCO savings accounts. 7KHVHFRQGVHJPHQWLVWKHQRQGHSRVLWWDNLQJ6$&&2V QRQ'76$&&26 ZKLFK PRELOL]HVDYLQJV GHSRVLWV IURPWKHLUPHPEHUVDQGVWULFWO\XWLOL]HWKHGHSRVLWVDV FROODWHUDOIRUFUHGLWIDFLOLWLHVDGYDQFHGWRVXFKPHPEHUV7KHVHGHSRVLWVDUHQRWZLWK GUDZDEOHE\WKHPHPEHUEXWFDQRQO\EHUHIXQGHG OHVVDQ\OLDELOLWLHVRZHGE\WKH PHPEHU XSRQWKHPHPEHU¶VZLWKGUDZDOIURPWKHPHPEHUVKLSRIWKH6$&&2 ,QDGGLWLRQWKHUHDUHDOVR526&$VDQG$6&$VZKLFKDUHQRWUHJXODWHG

10 KUSCCO established in 0LFUR¿QDQFH%DQN)XQGLQJ&KLFNHQ%XVLQHVV 1973 DQGDWWKHWLPHRIWKHVWXG\ WRXUKDGDPHPEHUVKLSRI over 3,600 SACCOS.

7KH6$&&26LQ.HQ\DDUHGLYLGHGLQWRWZRVHJPHQWVSULQFLSDOO\GL൵HUHQWLDWHGE\ WKHQDWXUHRIVDYLQJVDQGGHSRVLWVWKH\PRELOL]HIURPWKHLUPHPEHUVKLS 7KH¿UVWVHJPHQWLVWKHGHSRVLWWDNLQJ6$&&26 '76$&&2V ZKLFKDUH SHUPLWWHGWRWDNHGHPDQGGHSRVLWVDQGR൵HUZLWKGUDZDEOHVDYLQJVDFFRXQWVVHUYLFHV WRWKHLUPHPEHUV6RPHRIWKHPHPEHUVRIWKLVVHJPHQWUHFHLYHWKHLUVDODULHVGLUHFWO\ into their SACCO savings accounts. 7KHVHFRQGVHJPHQWLVWKHQRQGHSRVLWWDNLQJ6$&&2V QRQ'76$&&26 ZKLFK PRELOL]HVDYLQJV GHSRVLWV IURPWKHLUPHPEHUVDQGVWULFWO\XWLOL]HWKHGHSRVLWVDV FROODWHUDOIRUFUHGLWIDFLOLWLHVDGYDQFHGWRVXFKPHPEHUV7KHVHGHSRVLWVDUHQRWZLWK GUDZDEOHE\WKHPHPEHUEXWFDQRQO\EHUHIXQGHG OHVVDQ\OLDELOLWLHVRZHGE\WKH PHPEHU XSRQWKHPHPEHU¶VZLWKGUDZDOIURPWKHPHPEHUVKLSRIWKH6$&&2 ,QDGGLWLRQWKHUHDUHDOVR526&$VDQG$6&$VZKLFKDUHQRWUHJXODWHG

0LFUR¿QDQFH,QGXVWU\$VVRFLDWLRQV 7KHPLFUR¿QDQFHVHFWRULQ.HQ\DKDVWZRDVVRFLDWLRQVWKH.HQ\D8QLRQRI6DYLQJV DQG&UHGLW&RRSHUDWLYHV .86&&2 ZKLFKUHSUHVHQWVWKHVDYLQJVDQGFUHGLW FRRSHUDWLYHV 6$&&26 DQGWKH$VVRFLDWLRQRI0LFUR¿QDQFH,QVWLWXWLRQV $0), ZKLFKUHSUHVHQWVPLFUR¿QDQFHLQVWLWXWLRQV .86&&2ZDVHVWDEOLVKHGLQDQGDWWKHWLPHRIWKHVWXG\WRXUKDGD PHPEHUVKLSRIRYHU6$&&26 .86&&2LVUHJLVWHUHGDVDOLPLWHGOLDELOLW\FRPSDQ\GULYHQE\FRPPRQ VKDUHKROGLQJDVRSSRVHGWREHLQJPHPEHUGULYHQ 7KHLQLWLDOIXQGLQJIRU.86&&2ZDVWKURXJKVKDUHR൵HULQJWRDOOPHPEHUVZLWK GL൵HUHQWFODVVHVRIVKDUHVEHLQJR൵HUHGWRPHPEHURUJDQLVDWLRQVLQUHODWLRQWRWKH size of the organisation. 7KHOHJDOIUDPHZRUNKDVVLJQL¿FDQWO\FRQWULEXWHGWRWKH¿QDQFLDOVXVWDLQDELOLW\RI WKHDVVRFLDWLRQDVLWLVDEOHWRLQYHVWWUDGHRQLWVRZQDFFRXQWDQGDOVRRQOHQGWR PHPEHURUJDQLVDWLRQVWKURXJKDOHQGHURIODVWUHVRUWZLQGRZ

11 .86&&2LVDOVRSOD\LQJDVLJQL¿FDQWUROHLQFDSDFLW\EXLOGLQJRIPHPEHUVWKURXJK ZHOOVWUXFWXUHGQDWLRQDODQGUHJLRQDOWUDLQLQJSURJUDPVDVZHOODVLQKRXVHWUDLQLQJ SURJUDPVIRULQGLYLGXDOLQVWLWXWLRQV)XUWKHU.86&&2DOVRSURYLGHVDSODWIRUPIRU SHHUOHDUQLQJDQGNQRZOHGJHH[FKDQJHIRUPHPEHULQVWLWXWLRQVWKURXJKVWXG\WRXUVWR other countries. .86&&2KDVHVWDEOLVKHGDFRGHRIFRQGXFWDQGDERDUGFKDUWHUIRULWVERDUGRIGL UHFWRUVDQGPRGHOE\ODZVIRUWKH6$&&26ZKLFKDUHUHJLVWHUHGZLWK6$65$DQG reviewed annually.

$VVRFLDWLRQRI0LFUR¿QDQFH,QVWLWXWLRQV $0), 7KH$VVRFLDWLRQRI0LFUR¿QDQFH,QVWLWXWLRQV $0), ZKLFKZDVHVWDEOLVKHGLQ ZLWK¿YH PHPEHUVKDVDFXUUHQWPHPEHUVKLSRILQVWLWXWLRQVZKLFKLQFOXGH PLFUR¿QDQFHEDQNVFUHGLWRQO\PLFUR¿QDQFHLQVWLWXWLRQV6$&&26ZKROHVDOH IDFLOLW\IXQGHUVDQGGHYHORSPHQWDORUJDQLVDWLRQV 7KHPDQGDWHRI$0),LQFOXGHVSROLF\DGYRFDF\FDSDFLW\EXLOGLQJRIPHPEHU LQVWLWXWLRQVQHWZRUNLQJDQGOLQNDJHVDQGUHVHDUFKDQGNQRZOHGJHPDQDJHPHQW,Q DGGLWLRQ$0),HVWDEOLVKHGD5HVRXUFH&HQWHUWRHQVXUHWKDWLQIRUPDWLRQRQWKH PLFUR¿QDQFHLQGXVWU\LVV\VWHPDWLFDOO\JHQHUDWHGVWRUHGDQDO\VHGDQGGLVVHPLQDWHG WRIDFLOLWDWHLQIRUPHGGHFLVLRQPDNLQJ $WWKHWLPHRIWKHVWXG\WRXU$0),ZDVLQYROYHGLQUHYLHZLQJWKH0DUNHW&RQGXFW %LOOZKLFKLVH[SHFWHGWRIDFLOLWDWHRYHUVLJKWRIFUHGLWRQO\PLFUR¿QDQFHLQVWLWXWLRQV which are currently not regulated or supervised.

0LFUR¿QDQFH7RXU7HDP$W6$65$

&KDOOHQJHVWKDWKDYHPLOLWDWHGDJDLQVWWKHJURZWKRI$0),LQFOXGHFRPSHWLWLRQIURP DOWHUQDWLYHQHWZRUNVVXFKDVWKH'LJLWDO/HQGHUV$VVRFLDWLRQZHDNYDOXHSURSRVLWLRQ LQDELOLW\WRH൵HFWLYHO\LQÀXHQFHSROLF\RYHUUHOLDQFHRQH[WHUQDOIXQGLQJDQGODFNRI VHOIVXVWDLQDELOLW\SODQ

12 4.4 THE MICROFINANCE LEGAL AND REGULATORY FRAMEWORK

7KHWHVWDQGOHDUQDSSURDFKWRUHJXODWLRQHPSOR\HGE\WKH.HQ\DQDXWKRULWLHV SURYLGHGDFRQGXFLYHHQYLURQPHQWIRUWKHJURZWKRIWKHPLFUR¿QDQFHVHFWRULQ general. 7KHVXFFHVVRIWKHLQWHUQDWLRQDOO\DFFODLPHG03HVDLVDWWULEXWHGWRWKH&HQWUDO%DQN RI.HQ\D¶VDSSURDFKWRUHJXODWLRQ:KHQ03HVDZDVODXQFKHGLQWKH&HQWUDO %DQNRI.HQ\DRQO\LVVXHGDµ/HWWHURI1R2EMHFWLRQ¶WR6DIDULFRPZKLOHWKH GHGLFDWHGSD\PHQWV\VWHPVUHJXODWLRQVZHUHUROOHGRXWPXFKODWHUVWDUWLQJZLWKWKH DGRSWLRQRIWKH1DWLRQDO3D\PHQW6\VWHP$FWLQDQGWKH1DWLRQDO3D\PHQW 6\VWHP5HJXODWLRQVLQ 7KHVXSHUYLVRU\IUDPHZRUNIRUWKHPLFUR¿QDQFHVHFWRUSURYLGHVIRUSUXGHQWLDOVXSHU YLVLRQRIGHSRVLWWDNLQJPLFUR¿QDQFHLQVWLWXWLRQVRUPLFUR¿QDQFHEDQNVXQGHUWKH SXUYLHZRIWKH&HQWUDO%DQNRI.HQ\DDQGGHSRVLWWDNLQJ6$&&26XQGHUWKH 6$&&26RFLHWLHV5HJXODWRU\$XWKRULW\1RQGHSRVLWWDNLQJ6$&&26DUHVXEMHFWWR QRQSUXGHQWLDOUHJXODWLRQXQGHUWKH&RPPLVVLRQHURI&RRSHUDWLYHVLQWKH0LQLVWU\RI &RRSHUDWLYHV'HYHORSPHQW 0DUNHWLQJ 'HSRVLWWDNLQJPLFUR¿QDQFHLQVWLWXWLRQVDUHUHJXODWHGDQGVXSHUYLVHGWKURXJKWKH 0LFUR¿QDQFH$FWDQGWKH0LFUR¿QDQFH 'HSRVLW7DNLQJ,QVWLWXWLRQV 5HJXODWLRQVE\WKH&HQWUDO%DQNRI.HQ\D7KH$FWSURYLGHVIRUWKH PRELOLVDWLRQRIGHSRVLWVE\PLFUR¿QDQFHEDQNVIURPWKHJHQHUDOSXEOLFWKXV SURPRWLQJVDYLQJVFRPSHWLWLRQH൶FLHQF\DQG¿QDQFLDODFFHVV ,QWKH0LFUR¿QDQFH$FWZDVDPHQGHGZLWKDYLHZWRLQWHUDOLDFKDQJH WKHQDPHIURPµGHSRVLWWDNLQJPLFUR¿QDQFHLQVWLWXWLRQV¶WRµPLFUR¿QDQFHEDQNV¶DQG ZLGHQSHUPLVVLEOHDFWLYLWLHVIRUPLFUR¿QDQFHEDQNVWRLQFOXGHLVVXLQJRIWKLUGSDUW\ FKHTXHVRSHQLQJRIFXUUHQWDFFRXQWVDQGWUDQVDFWLRQVRIIRUHLJQH[FKDQJHEXVLQHVV )XUWKHUWKHUHDUH5HJXODWLRQVDQG*XLGHOLQHVRQFUHGLWUHIHUHQFLQJDQGDJHQF\PRGHO IRUPLFUR¿QDQFHEDQNVZKLFKZHUHGHYHORSHGLQ 7KHRSHUDWLRQVRIVDYLQJVDQGFUHGLWFRRSHUDWLYHVLQ.HQ\DDUHJXLGHGE\WZRPDMRU VWDWXWHVQDPHO\WKH&RRSHUDWLYH6RFLHWLHV$FW>&KDSWHU@DQGWKH6DFFR 6RFLHWLHV$FW>&KDSWHU%@VXSSRUWHGE\WKH'76$&&2V5HJXODWLRQV 7KH&RRSHUDWLYHV6RFLHWLHV$FWSULQFLSDOO\GHDOVZLWKWKHUHJLVWUDWLRQLQFRUSRUDWLRQ DQGJHQHUDOVXSHUYLVLRQRIDOOFRRSHUDWLYHVVRFLHWLHVLQFOXGLQJ'76$&&2VDQGLV DGPLQLVWHUHGE\WKHR൶FHRIWKH&RPPLVVLRQHUIRU&RRSHUDWLYH'HYHORSPHQW 7KHOHJDOIUDPHZRUNIRUWKHVXSHUYLVLRQRI'76$&&2VLVSURYLGHGE\WKH6DFFR 6RFLHWLHV$FWZKLFKSURYLGHVWKHOHJDOPHFKDQLVPVIRUWKHSUXGHQWLDOUHJXODWLRQDQG VXSHUYLVLRQRI'76$&&2VLQ.HQ\DLQOLQHZLWKLQWHUQDWLRQDOEHVWSUDFWLFHV7KH 6DFFR6RFLHWLHV5HJXODWRU\$XWKRULW\DGPLQLVWHUVWKH6DFFR6RFLHWLHV$FWDQGLVUH VSRQVLEOHIRUUHJXODWLRQDQGVXSHUYLVLRQRIDOO'76$&&2V

13 4.5 STATUS OF THE MICROFINANCE SECTOR

7KHPLFUR¿QDQFHVHFWRUSOD\VDSLYRWDOUROHLQGHHSHQLQJ¿QDQFLDOPDUNHWVDQG HQKDQFLQJDFFHVVWR¿QDQFLDOVHUYLFHVE\DVLJQL¿FDQWSURSRUWLRQRIWKH.HQ\DQ SRSXODWLRQ7KHPLFUR¿QDQFHEDQNVDUHFRQVLGHUHGDVEHLQJFRPSOHPHQWDU\WR FRPPHUFLDOEDQNVE\R൵HULQJYLWDO¿QDQFLDOVHUYLFHVWRWKHPDUJLQDOLVHG FRPPXQLWLHVRIWKHSRSXODWLRQLQ.HQ\DWKDWODFNDFFHVVWRFRPPHUFLDOEDQNV $VXPPDU\RIWKHFRQWULEXWLRQRIWKHPLFUR¿QDQFHEDQNVWRWKHEDQNLQJVHFWRUDVDW 'HFHPEHULVVKRZQLQWKHWDEOHEHORZ

Indicator Commercial Banks (ComBks) Micro nance Banks Proportion (USD billion) (MFBs) (USD million) of MFBs to ComBks Total Assets 40.03 676 1.69%

Net Total Loans* 29.00 389 1.34%

Total Deposits 20.13 428 2.13%

Excluding mortgage loans* Source: Central Bank of Kenya, Bank Supervision Annual Report, 2017

7KHPLFUR¿QDQFHEDQNVLQ.HQ\DDUHPDNLQJLQURDGVLQWKH¿QDQFLDOLQFOXVLRQVSDFH $VDW'HFHPEHUPLFUR¿QDQFHEDQNVKHOGDFWLYHGHSRVLWDFFRXQWV DQGDFWLYHORDQDFFRXQWV $FFRUGLQJWRWKHGDWDPDGHDYDLODEOHE\WKH$VVRFLDWLRQRI0LFUR¿QDQFH,QVWLWXWLRQV DVDW-XQHDWRWDORIFUHGLWRQO\PLFUR¿QDQFHLQVWLWXWLRQVZKRDUH PHPEHUVRI$0),KDGWRWDOORDQSRUWIROLRRI.+6ELOOLRQ 86'PLOOLRQ 4.5.5 The savings and credit cooperative societies subsector has evolved in the past \HDUVLQWRDIRUPLGDEOHIRUFHIRUWKHVRFLDODQGHFRQRPLFWUDQVIRUPDWLRQRIWKH .HQ\DQHFRQRP\DQGDSLOODURI¿QDQFLDOLQFOXVLRQWRWKHJUHDWHUSRSXODFHRIWKH FRXQWU\2YHUWKH\HDUVWKH6$&&2VKDYHGHYHORSHGLQWRDKRXVHKROGQDPHQRW RQO\IRUXQEDQNHGDQGORZLQFRPHKRXVHKROGVEXWIRUWKHPDMRULW\RIWKH.HQ\DQ population. 7KH6$&&26VXEVHFWRUVXSSRUWVGLUHFWO\DQGLQGLUHFWO\WKHOLYHOLKRRGVRIRYHU PLOOLRQSHRSOHUHSUHVHQWLQJRIWKHHQWLUH.HQ\DQSRSXODWLRQ7KHVXEVHFWRU FRQWULEXWHVQHDUO\RIWKHVDYLQJVPRELOLVHGDQGRIWKHORDQVDGYDQFHGE\ SACCOS in Africa.

14 $FFRUGLQJWR6$65$DVDW0D\WKH6$&&26PRELOLVHGRYHU.VKV ELOOLRQ 86'ELOOLRQ LQVDYLQJVGHSRVLWVFRQVWLWXWLQJVOLJKWO\RYHURI .HQ\D¶V*'3DQGDFFRXQWLQJIRURIWKHWRWDODFFXPXODWHGVDYLQJVLQWKH FRXQWU\7KH6$&&26KDGFUHDWHGDVVHWVYDOXHGDW86'ELOOLRQ $VXPPDU\RIWKHSHUIRUPDQFHRIWKH'76$&&26WKDWDUHXQGHUWKHSXUYLHZ RI6$65$DVDW'HFHPEHULVVKRZQLQWKHWDEOHEHORZ

Indicator 2017 2018 Number of DT-SACCOs 174 174 Membership 3,599,200 4,193,158 Total Assets (USD billion) 4.43 4.95 Total Gross Loans (USD billion) 3.31 3.74 Total Savings Deposits (USD billion) 3.07 3.42

Source: SACCO Societies Regulatory Authority, 2019

4.5.9 In terms of clusters, government based and teacher based SACCOs dominate the DT-SACCOS subsector contributing 38.37% and 34.83% of total deposits respectively, and 38.27% and 37.33% of the loan portfolio respectively as at 31 December 2018. 4.5.10 The SACCOS also play a critical role in the provision of housing to the people of Kenya with 14,000 mortgage loan accounts contributing about 40% of the total national mortgage loans all provided through the micro housing scheme products.

4.6 MICROFINANCE PRODUCT OFFERING 4.6.1 The country’s Vision 2030 has created conducive macroeconomic and regulatory environment for the microfinance sector to thrive and meet the specific targets set before the sector. This has given the financial services providers, particularly microfinance banks and SACCOS a latitude to be innovative in product and services development. 4.6.2 The microfinance products are designed and developed to meet specific needs of their customers and are also aligned to government national policies of economic development for the uplifting of the standard of living of the communities. The thrust of the loans offered by microfinance institutions is premised on value-addition.

15 4.5.9 In terms of clusters, government based and teacher based SACCOs dominate the DT-SACCOS subsector contributing 38.37% and 34.83% of total deposits respectively, and 38.27% and 37.33% of the loan portfolio respectively as at 31 December 2018. 4.5.10 The SACCOS also play a critical role in the provision of housing to the people of Kenya with 14,000 mortgage loan accounts contributing about 40% of the total national mortgage loans all provided through the micro housing scheme products.

KWFT Offering Value-Added Products to Women

4.6.3 Kenya Women’s Bank (KWFT), for example, seeks to ensure that the specific needs of the customer are addressed by each of their product offering.

16 KWFT demonstrated this efficiently as they try to solve the challenges of the rural woman by providing products such as water tanks, solar solutions, and micro-housing loans to rural women to facilitate better living standards.

KWFT Funding Extension to Houses & Water Tanks

4.6.4 KWFT demonstrated this efficiently as they try to solve the challenges of the rural woman by providing products such as water tanks, solar solutions, and micro-housing loans to rural women to facilitate better living standards. 4.6.5 The categories of products and services include, business, consumption, green microfinance, sanitation and hygiene, shelter solutions, agribusiness, and savings. 4.6.6 The business products and services include asset financing for equipping MSMEs, value addition financing, and the generic working capital loans. 4.6.7 Green microfinance products include clean and renewable energy solutions particularly for rural communities in the form of solar products for lighting and heating solutions and biogas technologies for cooking solutions. 4.6.8 The sanitation and hygiene products include funding for water harvesting, storage and purification solutions which are offered in partnership with identified MSMEs which are contracted to manufacture the products while financial services providers extend loans to clients. 4.6.9 The agribusiness products include value chain financing, greenhouse financing, micro dairy farming financing, poultry and fish farming, as well as loans to agro-dealers. 4.6.10 The shelter solutions consist of micro housing loans for construction of a new house, renovation or improve the existing house, and expanding the house. These loans are offered on an incremental or stage by stage basis. 4.6.11 The savings products include withdrawable and non-withdrawable savings offered by SACCOS, SACCOS branded debit cards offered in partnership with banks, current accounts and foreign exchange services offered by microfinance banks. In addition, Kenyan DT-SACCOs can also offer local and international money transfer services.

17 Unaitas SACCO Establishing Its Presence in Kenya

4.6.12 Financial literacy and consumer education is a critical component which is complementary to product offering by microfinance institutions and SACCOS. All institutions visited alluded to the importance of financial literacy on guiding customers not only to properly manage their businesses but also manage their loan repayments. 4.6.13 Customers are taken through financial advisory process which helps them identify the correct financial product which suits their circumstances and meet their needs. The institutions take the customers through business management skills and the importance of maintaining good relations through consistent and timeous loan repayments, and as a result the delinquency rates are generally low.

Delivery Channels…

4.6.14 The delivery channels for the microfinance products and services are diverse and mostly technology driven, riding on the robust mobile banking platforms. There is strong partnership and collaboration among microfinance services providers, mobile network operators and financial technology companies (Fintechs), which has resulted in the development of the most robust financial services delivery channels in Africa.

18 4.6.15 In 2017 Kenya was ranked the top country on financial and digital inclusion for the third consecutive year in a survey by a US-based public institution, buoyed by a wide adoption of mobile money in the economy and interoperability of systems.

55 KEY TAKEAWAYS FROM THE STUDY TOUR

5.1.1 The rapid development of technology-based delivery channels was a result of the pragmatic approach by respective regulatory authorities in the country, who adopted a test and learn attitude before introducing regulatory and supervisory frameworks to maintain financial sector stability and protect consumers. The efficiency and effectiveness of the financial services delivery channels are buttressed by close and complementary relations among the financial institutions regulatory authorities and the communications and technology regulatory authorities. 5.1.2 The delivery channels range from the generic brick and mortar presence to branchless approaches entrenched into agency banking and mobile banking. Most microfinance banks and SACCOS have collaborated with fintech companies in developing technological applications which enable consumers of financial services to access financial products and services from the comfort of their homes and offices regardless of whether they are in the urban or rural areas.

19 KWFT – Promoting Innovation in Agriculture

5.1.3 Agency banking is well developed as a delivery channel in Kenya. As at 31 December 2018, five microfinance banks had a total of 2,064 agents. The Kenya Women Microfinance Bank had 1,917 agents and 75 ATMs which were supported by 245 branches located in 45 of the country’s 47 counties (districts). 5.1.4 Agency banking is also popular with SACCOS, and one of the SACCOS visited, Unaitas, had a total of 500 agents supported by 25 branches countrywide. 5.1.5 One of the stimuli to growth of agent banking is non-exclusivity requirement for agents. The Kenyan law promotes multi-agency approach, where one agent can enter into such relations with more than one financial services providers. Agent training and capacity building remain a critical aspect for all financial services providers.

The Role of Fintech in Microfinance in Kenya… 5.1.6 Financial technology (fintech) may be defined as the application of innovative business models and technology to improve the delivery of financial services. 5.1.7 One of the most transformational opportunities presented by fintech is financial inclusion, as new technologies enable more people to access financial services. 5.1.8 Digital financial services can expand the delivery of basic financial services to the poor through innovative technologies like mobile-phone-enabled solutions, electronic money models and digital payment platforms. Technological innovations, can also be a catalyst for the provision and use of other financial services including insurance, investments, and financial education.

20 1.1.1 Kenya is among the countries that have made significant inroads in the financial inclusion space through the mobile money system. The country pioneered mobile financial services via M-Pesa.

5.1.10 M-Pesa project was birthed from a “mobile micro-finance” application project whose mission was “to enable increased connectivity in the micro-finance sector, by providing a data communications platform that would allow financial institutions to grow.” 5.1.11 M-Pesa however pivoted from microfinance repayments to person-to-person payments based on the feedback loop of consumer research and consumer behavior in the pilot stage. Over 96 per cent of the Kenyan households use M-Pesa. The model is increasingly defining the day-to-day running of businesses in the country.

5.1.12 Following the launch of M-Pesa in 2007, a diverse array of financial technology innovations started to sprout, making Kenya the hub of Fintech in Africa. In many ways, the original “mobile micro-finance” concept came full circle as financial institutions linked with M-Pesa to make and receive payments.

5.1.13 Once this moved beyond just transactions to more strategic partnerships with banks, it had a dramatic impact on formal financial inclusion. 5.1.14 The development of fintech is most effective when innovators, investors and regulators interact, build networks and learn from each other.

Students using the Equitel Learning Platform – Equity Bank

21 5.1.15 As a result, the development of fintech solutions is generally concentrated in specific geographical locations, or ‘hubs’, where five key elements co-exist and work together. The elements are: a) Markets; b) Talent; c) Capital; d) Progressive regulation; and e) Strong government support. 5.1.16 While circumstances of different economies differ and it may be difficult to find all the five elements sufficiently present, it has been suggested that Kenya’s possibility frontier for financial innovation is further than for most of its peers because of the levels of financial inclusion, the extent of financial infrastructure and an enabling policy environment. 5.1.17 At the time of the study tour, the Capital Markets Authority in Kenya had established a regulatory sandbox, while CBK was still in the exploration phase. Regulatory sandboxes help regulators to develop appropriate interventions which manage risk while promoting innovation.

5.2 CHALLENGES OF THE MICROFINANCE SECTOR IN KENYA 5.2.1 Despite having a high level of development, the Kenyan microfinance sector faces various challenges which include: a) weak corporate governance structures and practices, which is more prevalent in the SACCOS sector; b) business models that are not aligned to changing environment (CBK analysis of MFBs); c) low visibility of microfinance banks which hinders mobilisation of deposits thus increased reliance on expensive borrowed funds; d) lack of robust regulatory framework for credit-only microfinance institutions which raises consumer protection issues revolving around transparency and disclosure; e) lack of skilled personnel; f) emergence of digital lenders who are not regulated increasing unfair competition and creating bad name for microfinance with their unethical treatment of consumers. g) inadequate ICT systems for individual SACCOs; h) absence of a Central Liquidity Facility and deposit guarantee fund, for SACCOS; and i) budgetary constraints at SASRA which affects the efficiency and effectiveness of supervision of the subsector.

22 6 KEY TAKEAWAYS FROM THE STUDY TOUR

6.1 The key takeaways from the study tour are discussed below. Regulatory and Supervisory Framework… 6.2 A number of key takeaways were noted from the microfinance regulatory and supervisory approach adopted by the microfinance regulatory authorities in Kenya. Test and learn approach 6.3 The test-and-learn approach adopted by the regulatory authorities in Kenya has facilitated the development of a conducive environment for innovative products and delivery channels development, compliance and constructive dialogue between the regulators and the regulated entities. 6.4 In this regard microfinance players adopted a model where they engage the regulator from product development, piloting stage through to full roll out of the new product prior to the regulator putting in place provisions for regulating such products or activities.

Regulatory Flexibility & Responsiveness 6.5 In line with the test and learn approach, it was noted that the regulatory authorities in Kenya have adopted the flexibility and responsiveness approach to regulating the microfinance sector. 6.6 The CBK facilitated amendments to the Microfinance Act in 2013, following lobbying by microfinance institutions to be allowed to operate as ‘microfinance banks’ and issue checking accounts to their clients, as well conduct foreign exchange transactions. Microfinance banks are allowed to hold accounts with the Central Bank of Kenya (CBK) and to participate in the clearing house. 6.7 Further, in response to industry concerns regarding the cost of establishing full branches, the central bank authorised DTMFIs to establish ‘marketing offices’ which have less minimum requirements and limited scope of activities compared to fully fledged branches. 6.8 At the time of the study tour, CBK was working on proposed amendments to the Microfinance Act to reflect lessons learnt to date. The proposals include a review of the provisioning requirements for microfinance banks and discontinuance of the category of community level microfinance banks which have registered little success.

Collaboration of Regulatory Authorities 6.9 In recognition of the importance of SACCOS in the development of the Kenyan financial services sector, there is a cut out collaboration framework between Central Bank of Kenya and the SACCOS regulatory authority, SASRA. The regulators collaborate through: a) A standing Memorandum of Understanding; b) Domestic Regulators Forum; and c) Central Bank of Kenya Governor is a member of the SASRA board of directors and the Director of Bank Supervision Department attends the meetings on behalf of the Governor.

23 Forward looking approach to regulation 6.10 In response to the rapid growth of financial innovation, and to facilitate regulatory foresight and forward looking approach to regulation, the Central Bank of Kenya has established a Data Analytics and Regtech Unit in Bank Supervision Division, as part of the Financial Inclusion Unit. With regards the developing areas of block chain technology and crypto currencies, the Central Bank of Kenya has to date embraced block chain technology. In addition there is a Financial Inclusion and Innovation Team which cuts across all the divisions of Central Bank of Kenya and is tasked with researches on technology advancement and other related innovations in the financial sector.

Role of Industry Associations… Industry associations in Kenya play an important role in the development of the microfinance sector in Kenya. 6.11 The legal form of KUSCCO, the SACCOS association, promotes sound corporate governance practices which facilitates professional running of the organisation, and maximisation of shareholder value. 6.12 Industry associations, in addition to the lobbying and advocacy mandate, can become successful business entities in their own right which are financial independent and sustainable. 6.13 Associations can play a critical role and provide intra-sector liquidity support to members. KUSCCO has established an Emergence Liquidity Facility where SACCO members with surplus funds invest and the funds are deployed to support deficit SACCO members who may require liquidity support. 6.14 KUSCCO has established a code of conduct which promotes good corporate governance and compliance in the sector which has facilitated growth and development of a sound and vibrant SACCOS sector in Kenya.

Collaboration between the Associations and the Regulators… 6.15 Effective collaboration between industry associations and regulators promotes industry compliance with regulations and best practices. In Kenya AMFI is advocating for the regulation of credit-only microfinance institutions and is actively participating in the development of the regulatory framework for the subsector. 6.16 In addition, KUSCCO supported the establishment SASRA, the regulatory authority for the SACCOS.

Value-addition client-tailored financial products… 6.17 Client-focussed product development is key in promoting financial inclusion as well as improving the standards of living of low income groups, while also promoting high loan repayment rates. 6.18 Microfinance institutions’ product development philosophy does not assume homogeneity of customer needs, but focuses on developing solutions to customer problems/challenges.

24 6.19 Microfinance institutions in Kenya have entered into strategic partnerships with service providers to ensure value-added products to the low income and the marginalised. These service providers include providers of solar panels – to facilitate provision of heating and lighting to the rural clients, providers of water tanks, providers of wood stoves, among others. 6.20 Institutions have also adopted a well-structured graduation process for their clients from group guaranteed loans, to individual borrowings, and loans for the individual micro business which has graduated to a small and medium enterprise.

Capacity Building and Financial Literacy… 6.21 Capacity building and financial literacy are key in building public confidence and loyalty in the microfinance sector. Empowered consumers have a good understanding of financial matters and skills to manage their businesses effectively which promotes high loan repayment rates.

Research & Development… 6.22 Product research and development is a key success factor in meeting client needs. Most of the microfinance institutions in Kenya have set up fully-fledged research and development departments whose key mandate is to look for opportunities for growth and introduction of new products. 6.23 Research and development facilitates piloting of new products with a selected market and observing client response, challenges and areas of improvement before rolling it out.

Non-exclusive agent networks… 6.24 Adoption of non-exclusive agency promotes expansion of financial inclusion. The industry in Kenya has embraced non-exclusive agents’ approach where a single agent can represent multiple financial services providers including commercial banks, microfinance banks, mobile money transfer agents and SACCOS.

Ability to embrace technology and innovation… 6.25 All microfinance service providers visited have fully embraced technology. All parties use core banking systems that allow them to integrate mobile banking, credit scoring and mobile payment system among other systems. 6.26 All banks, microfinance banks and SACCOS are fully integrated with the Mpesa and Airtel mobile banking platforms as Kenyans have fully integrated their payment systems and embraced the mobile banking platforms. Equity Bank has gone as far as investing into a telco specifically for banking services in order to improve their payments system.

25 The Role of Fintech in Microfinance in Kenya…

6.27 The development of the microfinance sector in Kenya and its contribution to the financial inclusion agenda has been significantly enhanced by the developments in the fintech industry. 6.28 Fintech has enhanced efficiency, convenience and reach of financial services to low income groups. Financial innovation, therefore, has the potential to provide for a more efficient allocation of resources and thereby a higher level of capital productivity and economic growth. 6.29 An enabling regulatory environment promotes development of a vibrant fintech sector that contributes to financial inclusion and economic development.

7 RECOMMENDATIONS FOR THE MICROFINANCE SECTOR IN ZIMBABWE

7.1 Given the challenges that have constrained the development of microfinance sector in Zimbabwe and the lessons learnt from the study tour, the following recommendations are being proffered. Regulatory Authorities: 1. Regulatory authorities are urged to adopt the test and learn approach to regulating the microfinance sector in order to promote innovation in the sector and enhanced contribution to financial inclusion and economic development. 2. Enhanced regulatory cooperation and joint implementation of mutually beneficial programmes such as financial literacy and consumer education programmes is recommended. This will facilitate cost effectiveness and wider dissemination of information. 3. The development of a formal regulatory framework for SACCOS should be expedited in order to spur the development of a vibrant SACCOS sector which is key in promoting financial inclusivity and rural development. 4. In view of the size of the SACCOS sector in Zimbabwe, the establishment of a separate SACCOS regulatory authority may not be a viable option at this juncture. In this regard, it is recommended that the capacity of the Department of Cooperatives in the Ministry of Women Affairs, Community and Small & Medium Enterprises Development be enhanced to facilitate adequate oversight of the sector. 5. In the past the Ministry has proposed the hiving of SACCOS beyond a certain threshold in terms of savings, to the Reserve Bank of Zimbabwe for prudential supervision. This is considered a more viable option at this juncture.

Industry Associations 1. It is recommended that apex bodies in the microfinance sector adequately incorporate sound corporate governance practices to improve their public standing and stature within the industry for confidence building and ability to attract microfinance development partners. 2. It is also recommended that industry associations expand the scope of their activities in order to become financially independent and sustainable, while also offering quality support to the industry. 3. The Department of Cooperatives should facilitate the establishment of a robust association for the SACCOS sector which is capable of adequately representing and spearheading development in the sector. The current apex institution, NACSCUZ was formed by one SACCOS and hence it is failing to adequately perform the mandate of an association.

Microfinance Practitioners 1. Microfinance practitioners should integrate research and development into their business models. 2. Microfinance practitioners are urged to incorporate customer-centricity in their product development. 3. Microfinance practitioners are encouraged to establish strategic partnerships with fintech companies for product development and innovative delivery channels. 4. Microfinance practitioners are also encouraged to establish strategic partnerships with suppliers of products required by microfinance clients in order to provide value addition microfinance products and services. 5. Microfinance institutions should also increasingly integrate financial literacy and related capacity building of clients.

27 7.2 The findings of the microfinance study tour in Kenya have revealed that the microfinance sector can significantly contribute to the expansion of financial inclusion and the development of the economy. Going forward the findings will inform the development of a Microfinance Development Strategy to facilitate realisation of the sector’s potential.

8 ACTION PLAN

A summary of the proposed action plan is provided in the table below.

RESPONSIBLE ACTIVITY TIMELINE STAKEHOLDER

Sensitization and information gathering RBZ, ZAMFI, MoFED, November workshop for all stakeholders MWACSMED 2019

Microfinance Development Strategy (MDS) RBZ, ZAMFI, MoFED, Drafting Workshop with core team of January 2020 MWACSMED stakeholders

Review Workshop for Draft MDS for all RBZ, ZAMFI, MoFED, March 2020 stakeholders MWACSMED

Review of the Draft MDS by external microfinance stakeholders (Consultative RBZ April 2020 process)

Submit Draft MDS to DG/ Governor RBZ June 2020

Launch of MDS by MoFED MoFED July 2020

RBZ, ZAMFI, MoFED, commencing MDS Sensitization workshops MWACSMED August 2020

28 ANNEX 1: DETAILS OF THE STUDY TOUR TEAM

NAME OF DELEGATE INSTITUTION POSITION Deputy Director, Bank 1. Mrs. Rachel S. Mushosho Reserve Bank of Zimbabwe Supervision 2. Deputy Director, Bank Mrs. Norah Mukura Reserve Bank of Zimbabwe Supervision 3. Mr. Simbarashe Principal Bank Examiner, Reserve Bank of Zimbabwe Mashonganyika Bank Supervision 4. CBZ Bank Limited- Red Sphere Mrs. Molly Dingani Managing Director Microfinance 5. Mr. Desmond Ali Homelink Finance Managing Director 6. Mr. Patrick Mangwendeza Microplan Financial Services Managing Director 7. Ministry of Women Affairs, Provincial Development Mrs. Sithembile Dube Community, SMEs & Officer Cooperatives Development 8. Mrs. Isabel Nyarota Old Mutual Finance Managing Director 9. Gideon Toronga Quadfin Financial Services Chief Executive Officer 10. James Msipa Quest Financial Services Chief Executive Officer 11. Zimbabwe Association of Mr. Godfrey Chitambo Microfinance Institutions Executive Director (ZAMFI)

12. Mrs. Mandas Marikanda Zimbabwe Women’s Chief Executive Officer 13. Mr. Tapiwa Makota Microfinance Bank Infrastructure Engineer

ANNEX II: LIST OF INSTITUTIONS VISITED

1. Central Bank of Kenya

2. SACCO Society Regulatory Authority (SASRA)

3. UNAITAS SACCOS

4. Craft Silicon Company Limited

5. Association of Microfinance Institutions

6. Equity Bank Limited

7. Faulu Microfinance Bank

8. Kenya Women Microfinance Bank Limited

9. Kenya Union of Savings and Credit Cooperatives (KUSCCO)