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THE STATUS OF THE MICROFINANCE INDUSTRY IN KENYA. PRESENTED AT THE 5 TH AFRACA MICROFINANCE FORUM 2 ND - 4 TH JULY 2008 COTONOU, BENIN. BY CASSIAN J. NYANJWA CENTRAL BANK OF KENYA. PRESENTATION LAYOUT. Geographic Location Key Economics Indicators Financial Sector Landscape

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the status of the microfinance industry in kenya
THE STATUS OF THE MICROFINANCE INDUSTRY IN KENYA

PRESENTED ATTHE 5TH AFRACA MICROFINANCE FORUM2ND - 4TH JULY 2008

COTONOU, BENIN

BY

CASSIAN J. NYANJWA

CENTRAL BANK OF KENYA

presentation layout
PRESENTATION LAYOUT
  • Geographic Location
  • Key Economics Indicators
  • Financial Sector Landscape
  • MSE Sector
  • Financial Access
  • Microfinance Industry in Kenya
      • Definition
      • Institutional Forms
      • Policy and The Microfinance Act
  • Challenges and Constraints
  • Way Forward
east african community kenya uganda tanzania burundi rwanda
EAST AFRICAN COMMUNITY(KENYA, UGANDA, TANZANIA, BURUNDI & RWANDA)

Member Countries

  • Kenya
  • Uganda
  • Tanzania
  • Rwanda
  • Burundi

Area: 1.8 m Sq KmPopulation: 82 m

kenya key economic indicators
KENYA: KEY ECONOMIC INDICATORS

Source: Economic Survey and Central Bank

why access
Why Access?
  • Consensus that there is constrained access to financial services and products
  • Mainly to economically active poor, low-income households and Micro- and Small- Scale Enterprises (MSEs)
  • Measurement of the magnitude of the access problem
  • Policy implications and progress made on access
  • FinAccess Survey Study, 2006
micro and small enterprises mses sector
Micro and Small Enterprises (MSEs)Sector
  • Businesses in both formal and informal sectors, classified into farm and non-farm categories employing 1-50 workers
  • Provide most sources of employment creation, income generation and poverty reduction to majority of the population
  • SMES employed app. 3.2m people in 2003 and accounted for 18% of national GDP (African Economic Outlook 2004/2005)
  • 90% MSEs lack access to credit
  • 80% of population live in the rural areas and engaged in agricultural activities and MSEs
  • Est.12.8% of rural households have access to credit from SACCOs and banks
  • Est.13% have access to saving
financial access strand
Financial Access Strand

Financially Included - 62%

Banked 19%

Financially Excluded

19

8

35

38

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

  • Formal Other
  • SACCOs and MFIs
  • (microfinance institutions)

Unbanked

No formal or informal financial products used

Informal

ASCA (Accumulating Savings and Credit Associations) and ROSCAs

Formal

Regulated banks,

building societies

or Kenya Post Office Savings Bank

key factors limiting access
Key Factors Limiting Access

Main reasons for low usage of formal financial services:

  • Low Incomes
    • About 50% are classified as poor & have no incomes worth banking
  • Cost of financial services
    • Access barriers (opening/minimum balances)
    • High transaction costs (account operating cost, physical & time)
  • Availability of informal (cheaper) alternatives
    • Shopkeepers/suppliers: credit
    • Friends/family: saving, credit, insurance, remittances
    • Matatus/buses: remittances
  • Unavailability in some regions e.g. North Eastern
slide13

Infrastructure development

  • Population density
  • Urbanisation
  • Climatic zones and agricultural activities
  • Socio-cultural factors
financial sector development vision 2030
Financial Sector Development – Vision 2030
  • The 3 pillars of the Financial Sector Development objectives are:-
    • Ensure STABILITY : Through policy and infrastructure development.
    • Foster EFFICIENCY : By encouraging increased competition and technological development.
    • Promote ACCESS: By providing an enabling environment.
microfinance definition
Microfinance - Definition
  • Microfinance - provision of financial services and products, mainly credit facilities, savings channels, money transfer services, micro-insurance to low-income households and MSEs in both rural and urban areas, while accepting a wider variety of assets as collateral
  • Characteristics:-
    • Short repayments periods
    • Relatively high interest rates (not always)
    • Graduated increase of loan size as incentive for repayments
    • Sustainability
    • Non conventional collateral/locally based collaterals etc.
institutional forms for microfinance businesses in kenya
Institutional Forms for Microfinance Businesses in Kenya

Microfinance business in Kenya is carried out by

different institutions with varied institutional

forms, including:-

  • Companies ( including commercial banks)
  • Co-operative Societies
  • Societies
  • Trusts
  • Non Governmental Organisations (NGOs)
  • State Corporations
  • Informal institutions such as ROSCAs, ASCAs, Moneylenders
  • Etc.
microfinance players
Microfinance Players
  • Microfinance players may be classified further into:
    • Commercial banks – Equity Bank, K-REP Bank, Co-operative Bank and Family Bank. Other banks are also down-streaming to microfinance
    • SACCOs – most have started the Front Office Service Activities (Retail banking)
    • MFIs – various forms
    • Informal financial service providers ranging from ASCAs and ROSCAs, money lenders and shopkeepers, among others
savings and credit co operative societies saccos credit unions
Savings and Credit Co-operative Societies – SACCOs (Credit Unions)
  • 4,900 registered and 3900 active and SACCO societies
  • SACCOs assets estimated at over KSh.167 bn. (US $2.2 bn.)
  • Salary based, jua kali, transport, community based, rural and traders SACCOs
  • Savings amounted to about KSh.160bn (US$ 2.46bn) or 35% of the national savings and loans outstanding amounting to KSh.110 bn. (1.7bn.)
  • 3.3 million ( approx. 11%) of the population Kenyans are members of a SACCO
  • Members support about 10 million people directly through credit facilities and saving
sacco legal and regulatory framework
SACCO Legal and Regulatory Framework
  • Some 180 SACCOs have started taking deposits by setting up FOSAs (Retail banking services)
  • The largest SACCOs easily rank as medium-sized banks – so any widespread problems could easily be systemic in scale
  • Lack of adequate regulatory and supervisory regime (Cooperative Societies Act)
  • The SACCO Societies Regulatory Bill, 2008 to address regulatory concerns under the CSA
microfinance industry
Microfinance Industry
  • Diverse institutional forms offering a variety of financial services and products to low-income households and SMEs
  • The umbrella body (AMFI) has 34 member institutions
  • Out of these, 25, 2, 4, 2 and 1 are retailers, wholesalers, banks, DFIs and insurance company, respectively
  • AMFI members by December 2007, collectively had 841 outlets, 2,073,363 and 493, 682 active savers and borrowers with KSh.16.589 million loans (US $ 260,000) disbursed and outstanding loan portfolio of KSh.16,007 million (US $ 250,000)
informal microfinance
Informal Microfinance
  • A number of MSEs depend on informal microfinance providers
  • The informal segment of the Microfinance landscape in Kenya is dominated by numerous Rotating and Accumulating Savings and Credit Associations (ROSCAs and ASCAs), money lenders, etc.
  • ASCAs and ROSCAs as user-owned and managed models that offer additional features that appeal to the community
  • There are numerous informal MFIs, however, the number and size of this market is yet to be ascertained
the policy on regulation and supervision of mfis in kenya
“ The Policy on Regulation and Supervision of MFIs in Kenya”
  • A Tiered approach to regulation & supervision:
    • Tier 1: ROSCAs and ASCAs: No regulation
    • Tier 2: Credit-only/ Non Deposit-taking MFIs: Self-regulated by umbrella body
    • Tier 3: Deposit-taking MFIs: Regulated and supervised by CBK)
  • The principal objective of the Microfinance Act is to provide the legal, regulatory and supervisory framework for the entire microfinance industry both deposit-taking and non-deposit taking MFIs
the microfinance act 2006
The Microfinance Act, 2006

The Microfinance Act covers:

  • Deposit-Taking MFIs (to be regulated by CBK)
  • Credit-Only MFIs - the minister to prescribe regulations to regulate their conduct

The deposit-taking MFIs are further categorised into:

  • Nationwide MFIs (operating countrywide) – min. core capital of 60M (USD 860,000)
  • Community MFIs (operating within a specific administrative region)- min. core capital of 20M (USD 300,000)
key highlights of the microfinance act and regulations
Key Highlights of The Microfinance Act and Regulations
  • Application – both deposit-taking and non-deposit taking MFIs
  • Licensing provisions – application, issuance and renewal of licence
  • Licence fees – institution and branches only (No fee for outlets and agents)
  • Revocation of licence
  • Restriction of a licence
licensing of deposit taking institutions
Licensing of Deposit-Taking Institutions
  • Two Categories of entry to regulated status
    • Direct Entry: New companies registering for licensing as deposit taking MFIs
    • Transforming Entity: Credit-only entities existing prior to the commencement of the Act transforming into regulated institutions under the Microfinance Act
  • CBK expects about 15 institutions to transform in the next 12 months from the date of implementation of the Act
key highlights of the microfinance act and regulations con t
Key Highlights of The Microfinance Act and Regulations …. Con’t
  • Maintain minimum liquid assets of 20%
  • Maintain, at all times, minimum capital requirements, including:
    • Core capital of ≥10% of total risk adjusted assets plus risk adjusted off balance sheet items
    • Core capital of ≥ 8% of total deposit liabilities
    • Total capital of ≥ 12% of total risk adjusted assets plus risk adjusted off balance sheet items
  • Place of business – head office, branch, outlet (marketing office, mobile units and ATMs) or agency
  • No declaration of dividends without adequate provisioning of bad debts
prohibited activities
Prohibited Activities
  • The main distinction with banks is the prohibited activities:
    • Issuing of third party cheques
    • Opening current accounts
    • Foreign trade operations
    • Trust operations
    • Investing in enterprise capital
    • Wholesale or retail trade
    • Underwriting or placement of securities
    • Purchasing or acquiring of land and buildings except for carrying out the deposit taking business
limits on loans or credit facility
Limits on Loans or Credit Facility
  • Limit on loans
  • Microfinance loan ≤ 2% of core capital
  • Large exposure microfinance loans >2% but ≤ 5% of core capital
  • Aggregate microfinance loans ≥ 70% of total loan portfolio, while loans >2% but ≤ 5% of core capital must be ≤ 30%
  • Insider Lending – loans ≤ 2% of core capital and aggregate of ≤ 20% of core capital
ownership and management structure
Ownership and Management Structure
  • 25% ownership restriction to a single person
  • 25% restriction shall not apply to a wholly owned subsidiary of a bank or financial institution
  • Any other company which the Minister may, on recommendation of CBK, specify
  • No transfer of 10% or more shares of an MFI without CBK approval (significant shareholders)
  • Every institution shall be managed by a Board of Directors of not less than five members
  • Financial reporting to be compliant with IFRS
  • Appointment of internal audit and external auditors
others provisions
Others Provisions
  • Supervision by the Central Bank of Kenya
  • Powers of CBK to intervene in management
  • Periodic returns and information
  • Information sharing arrangement
  • Deposit protection and liquidation by Deposit Protection Fund Board (same for institutions licensed under the Banking Act)
  • Transitional provisions - 12 months from 2nd May 2008
licensing of mfis
Licensing of MFIs
  • Commencement of licensing, regulation and supervision of deposit-taking MFIs started on 2nd May 2008
  • CBK has prepared necessary documentation tools including licensing procedures/ steps, examination manuals/ procedures, licence, returns, performance standards, among others
  • Capacity building: recruitment, training and exposure study visits, workshops/ conference, etc.
  • CBK expects about 15 existing MFIs to transform in the next 12 months
  • CBK has received three requests for name approval since 29th May 2009
constraints and challenges regulator
Constraints and Challenges:Regulator
  • Capacity and human resource development
  • Exposure to best microfinance practices
  • Best international best practices in microfinance operations, policy, legal, regulatory and supervisory frameworks including microfinance surveillance and performance standards
  • Development of appropriate documentation tools/ procedures
  • Risk management frameworks for microfinance practices
  • Automation of surveillance framework
constraints and challenges industry players
Constraints and Challenges:Industry Players
  • Management Information System (MIS)
  • Governance and internal control systems
  • Capacity and Human Resource Development
  • Transparency and Accountability
  • Reporting, Performance Standards and benchmarking
  • Exposure to best microfinance practices
  • Product Development and Delivery Channels
  • Transformation Challenges and Constraints
  • Legal, Regulatory and Supervisory framework
constraints and challenges
Constraints and Challenges

Policy Makers

  • Capacity and Human Resource Development
  • Exposure to Best Microfinance Policy and Practices including legal, regulatory and supervisory regimes

Support Service Providers

  • Technical Capacity and knowledge/ skills
  • Not Industry Specific
  • Need to Develop and Utilize ‘Rating’ Services
  • Need to Develop Credit Reporting Framework
way forward
Way Forward
  • Create an enabling environment - Policy, legal regulatory and supervisory framework including research and development
  • Develop appropriate performance standards and documentation tools
  • Infrastructure development (Credit bureaus, Credit Rating)
way forward cont
Way Forward ( Cont..)
  • Capacity building - CBK, Industry and Association (AMFI)
  • Investment funds (equity and grants)
  • Management Information Systems particularly to MFIs
  • Partnerships with like-minded players in the development of a sound and stable microfinance industry as an integral part of the financial system
slide37

CONTACT

        • Director, Bank Supervision Department
        • Central Bank of Kenya
        • P. O. Box 60000- 00200, Nairobi, Kenya.
        • E-Mail: fin@centralbank.go.ke or nyanjwacj@centralbank.go.ke
        • Tel: +254 20 2860000
        • Fax: +254 20 217940
        • www.centralbank.go.ke

THANK YOU