Informal systems most popular in Kenya: a recent study on access to finance in Kenya came up with some surprising results, such as the low popularity of microfinance institutions and the crucial role of mobile phone money transfers. Andrea Bohnstedt reports from Nairobi.
In Kenya, the Financial Sector Deepening (FSD) project, funded by the UK's Department for International Development (DFID), the World Bank, and the Swedish International Development Agency (SIDA), has teamed up with local research company Steadman to analyse who in Kenya has access to what kind of financial services.
The research hopes to develop policy recommendations, but also show opportunities for commercial financial institutions to expand their clientele.
The FinAccess survey uses four different categories: (1) access to formal financial services such as banks and the Post Office; (2) semi-formal services such as microfinance institutions (MFIs) and savings and credit co-operatives (SACCos); and (3) informal institutions such as rotating savings and credit associations (ROSCAs) and accumulating savings and credit associations (ASCAs). In the fourth category are those people who do not have access to any of the above and are therefore considered excluded from financial services. Unsurprisingly, the FinAccess Survey found that the key issue for access to financial services is income, driven by three determinants--being able to afford the minimum balance and costs for a bank account, being able to afford transport, to the bank, and finally having sufficient excess cash to justify having a bank account.
Therefore, access to banking services is most frequent for waged employees, above all in government, followed by large companies in the private sector.
At the other end, those who work in domestic service, or depend on transfers or pensions, show much higher rates of exclusion than people who depend on farming, livestock and fishing.
Age and gender are also factors: Older people, men and those with a formal education tend to have more access to formal financial services, whereas women often depend more on informal and group-based financial services.
The study attempts to distil the characteristics of the different categories to develop a clearer market segmentation, but effectively, most defining characteristics can be related to income. Older people presumably had a longer time to build up a career, have safe housing or ownership of items such as cars, TVs and fridges.
An occupation in domestic services earns a very low income, thus translating into fewer assets and the use of more informal savings and lending mechanisms. However, as the study also notes, it had not included any measure of income, consumption or expenditure, which would have brought this issue out more clearly, and could have been of more use to financial institutions wishing to use this information.
The survey highlights the importance of informal financial services that serve a good third of the Kenyan population. It is estimated that around $19m is mobilised every month in informal systems, which provide some sort of financial services to around 35% of the population, making them effectively the most widely used type of financial service provider.
Over half of this amount, an estimated $10m, is mobilised through ROSCAs, but at the same time, these are considered the least well organised informal systems. ROSCAs are used more frequently in rural areas, by women, by those in the age group of 35 to 44 years, and by those with primary education.
Most promising avenue
The informal sector consequently appears to be one of the most promising avenues to expand overall access to financial services. They are especially important for women, and offer a great degree of flexibility with comparatively low access barriers.
However, the survey notes that past experiences have shown that the injection of 'outside' funds hardly ever triggers growth in the groups' financial transactions, but often undermines the social capital that keeps the group together.
One of the recommendations is to build the financial management capacity of the groups, although it is not clear how this can be done affordably, and on a broad enough scale to have tangible overall impact unless integrated into an overall financial literacy programme.
The need for this beyond school level has become more apparent recently with the collapse of several pyramid schemes that promised obviously idealistic rates of return, and in which many savers lost money despite repeated public warnings by the central bank.
One of the more striking discoveries of the survey is the very limited role that so-called microfinance institutions play. Broadly, microfinance is defined as financial services for low-income clients. Although these products are not, in principle, tied to any specific institutional form, i.e. can be offered by commercial banks, co-operatives or other financial institutions, microfinance institutions are often set up as NGOs. Social and developmental considerations and a poverty alleviation focus tend to be at least as strong, if not stronger, than profit motives, and this impedes the organisation in its governance and efficiency and also in its ability to expand.
This finding is worth taking note of as MFIs are often the targets of donor interventions and support. As much as donors make a convincing argument that financial services help the poor to smoothen spikes in spending as well as save up for emergencies and obtain investment capital, one of their key counterpart organisations may be far from creating the desired outreach.
In Kenya, the financial market has become a lot more competitive in recent years, bolstered by the economic recovery since former president Daniel arap Moi left power.
New entrants, such as Equity Bank, aim specifically at the lower-income segment of the market, and with government securities no longer the safe fall-back option, the larger banks realised that they would have to broaden their clientele base--and could profitably do so.
The reduction of transaction costs through the use of new technologies has certainly also played a role in banks now considering serving smaller clients. They are now reopening branches in areas where they had previously shut them down.
As much as their competitors at the lower end of the market may scoff about this belated recognition that there is a market beyond blue-chip corporates and wealthy individuals, low and mid-income clients now have a much larger selection in retail financial services.
Many, especially in urban areas with higher bank branch density, prefer a bank to a savings cooperative. As a result of more members leaving, these organisations lack the capital for on-lending. Since access to loans was one of the key motives for many clients joining in the first place, they now face strong pressure to shape up and improve operations--or become irrelevant.
This should not be a surprising development considering that semi-formal and informal financial services are an alternative solution in an environment with a weak formal financial sector.
Currently, the most important source of loans for the largest share of the population is shopkeepers' credit--the equivalent of using credit cards in more advanced financial retail markets. This also shows the demand for consumer loans. However, banks in Kenya have started to push credit cards as well.
One of the most promising routes of providing financial services to so far un-banked citizens is from a very profit-oriented but non-financial sector. Both of Kenya's mobile phone operators, Safaricom and Celtel have launched mobile money transfer products.
Safaricom's M-PESA is effectively a virtual bank account operated through the client's mobile phone, whereas Celtel's Sokotele is based on agents taking, sending and disbursing payments (See African Business, November 2007). As this system does not require the sender or recipient to have a mobile phone, it offers potentially even lower access barriers.
Around 40% of Kenyans are estimated to have mobile phones, and another 40% are estimated to have access to a mobile, so 80% of the Kenyan population can potentially use mobile banking services.
Both the low charges per transaction and the small amounts that can be handled make this service immensely more accessible than regular banking services.
The potential of mobile money transfer services is especially noteworthy when looking at one of the survey findings that 18% of those without access to financial services are people who depend on transfers.
Financial Service Use--% currently using Savings Loans Bank/building society 14.6 2.6 Post office 5.7 -- SACCO 12.0 3.9 MFI 1.8 1.0 ROSCA 29.9 -- ASCA 5.6 1.9 Local shop -- 23.5 Borrowing from family or friend 5.6 13.3 Hidden savings 28.0 -- Group of friends 11.1 -- Government -- 1.1 Employer -- 1.1 Buyer -- 1.0 Informal moneylender -- 0.9 Use of financial services by principal source of income % in occupation Bank SACCO MFI Informal group unserved Wage, large est. 56.3 33.6 2.4 35.6 19.0 Wage, small est. 27.3 4.1 0.7 21.9 45.7 Wage, domestic 3.8 4.1 0.0 21.9 76.1 Agric wage, fulltime 9.3 0.0 0.0 32.8 91.3 Agric wage, seasonal 8.6 9.8 0.0 32.8 54.8 Agriculture, cash crops 15.0 38.4 0.3 32.8 26.1 Agriculture, other produce 10.4 9.6 2.0 38.7 45.7 Livestock (pastoralists) 4.3 4.1 0.7 21.9 76.1 Business 20.9 5.1 4.7 38.0 40.9 Transfers 9.6 2.4 0.0 24.1 54.8 Investment income 25.1 12.2 7.1 49.2 45.7 Not stated 24.4 12.2 8.2 32.8 91.3 Source: Financial Access Survey