Tackling the Frontiers of Microfinance in Kenya - The Role for Decentralized Services
by S. Johnson, M. Malkamaki , and K. Wanjau in 2005
World Region: Africa
Where does the frontier of sustainable microfinance lie? In Kenya, as in many African countries, providing financial services to poorer populations in rural areas remains a challenging goal. The Kenyan rural environment is characterized by poor communications infrastructure, relatively low population density, low levels of literacy, relatively undiversified economies, low profitability and/or high risk of many economic activities. As a result, it has so far proved unattractive to NGO microfinance institutions (MFIs), let alone commercial financial institutions.
Recent developments in the microfinance industry both in Kenya and elsewhere have involved the transformation of MFIs into banks or other forms of regulated institutions, greater emphasis on the potential of formal financial institutions such as banks to move "downmarket", and experiments with other types of financial providers such as postal and savings banks, along with renewed interest in the role of credit unions. The increasing commercialization of microfinance (Drake and Rhyne, 2002; Woller, 2002) has also shed light on the limitations of NGO microfinance institutions (MFIs) in achieving sufficient scale to reach the mass of poor people still unserved (see also (CGAP, 2004). Many of the expectations to reach scale have been fueled by the promise of new technologies, which anticipates that electronic banking will significantly lower the transactions costs of service delivery (Cracknell, 2004).
This paper proposes to map the frontiers of microfinance in Kenya based on poverty incidence and population density. It then presents a spectrum of centralized and decentralized models. The paper argues that the latter, which involve greater user-ownership and management , have the potential to provide services to poorer people and in rural areas due to inherently lower cost structures and key characteristics of their services, despite many challenges to their long-term effectiveness and sustainability. The paper next reviews five organizations in Kenya that are reaching into rural areas to explore where the frontiers lie. It concludes by discussing the implications of the models reviewed and potential strategies for their improvement as the “bottom up’ strand of a two-pronged approach which complements centralized service delivery.