A poultry enterprise supported by a microfinancier.

In 2006, the Nobel Peace Award went to Muhammad Yunus. Since he founded the Grameen Bank in Bangladesh in the late 1970s, microfinance has experienced very impressive growth. This is largely due to the many positive effects attributed to its programmes which have a strong agenda on providing financial products and services to the economically disadvantaged populace.
Financial sector development is recognized as a prerequisite to growth and poverty reduction. Over the years, microfinance institutions (MFIs) have been known to provide a channel for increasing the efficiency, depth, breadth and reach (access) of financial systems.
Today, there are different sizes of the said institutions worldwide offering needful financial services to the poor. Some of these institutions are very small in size and are community based, while others have attained growth in terms of scope and size and have developed into banks. According to a 2010 report by the World Bank, microfinance is largely applied in developing countries as low-rate finance, using the unique technique of group lending as a financial service for the poor. The less fortunate are thus enabled to gain control over their lives and become engines of economic growth provided they put their skills to work. MFIs have expanded throughout the developing and developed world and now serve over 10 million households worldwide. Despite the relative poverty of their clients, MFIs have been able to extend credit to poor households, while still maintaining high repayment rates and financial sustainability. Much of this success has been attributed to their innovative use of peer group lending; the practice of allocating loans to individuals with little or no collateral, but with social capital in the form of peers who are also co-applicants and in many cases are jointly liable.

The scope of financial inclusion
Regrettably, most of the financial services offered by commercial banks have been out of reach of the majority poor since they are highly priced and in some cases geographically out of reach for many poor people.
According to the World Bank (2014), financial inclusion remains low in Sub Saharan Africa: only 34.2% of the adult population has an account at a formal financial institution compared to developed economies like Germany (98.7%) and US (93.6%).
Financial inclusion can be defined as a state in which people who can use financial services have access to a quality full suite of the same , at affordable prices and in a convenient manner. It remains undoubted that financial inclusion is rooted on the tenet of financial access to services such as credit, payment, insurance deposit and investment – both physically and legal facilitation. Financial deepening as another way of explaining inclusion can be understood as a process of increasing the efficiency, depth ( for instance, credit intermediation and market turnover), breadth ( for instance, range of markets and instruments); and reach ( for instance access) of financial systems. As such, deepening can confer important benefits for macro-stability and sustained growth.
Thus policies to encourage increased access for the previously unbanked must, however, take into consideration the objectives of financial stability, especially in light of the current economic and financial crisis. They should create opportunities for sustainable development that is able to withstand the various economic shocks.

Kenya’s case
The Kenya Financial Sector Deepening programm (FSDK), was established with support from UK’s Department for International Development ( DFID) in 2005 to stimulate wealth creation and reduce poverty by expanding access to financial services for lower income households and small scale enterprises.
Kenya’s financial services market is relatively well-developed. Competition is strong amongst a diverse group of service providers that have moved deeper into the low-income market over the last five years, in part thanks to FSDK interventions. From 2006 to 2009, the overall financial inclusion increased from 58.7% to 67.3%. Gains have come from the introduction of mobile money and the responding rollout of branchless agency banking models by commercial and microfinance banks competing for the mass market space. Kenyan regulators have also been instrumental in introducing appropriate regulations to facilitate low-income banking and strengthen savings and credit co-operatives (SACCOs) and MFIs.

The use of technology and new business models
MFIs and MFBs (microfinance banks) have contributed to the deepening of financial inclusion by opening branches in many parts of Kenya and the region. They have also developed new financial products that are demand driven and appropriate to the needs of the clients. Both have also been quick to adopt mobile payments channels, usually to enable the servicing of loans. In that regard, Musoni Kenya for instance operates largely through the mobile phone platform in its product and service delivery. Mobile banking has resulted in a lot of advantages. To start with, clients can repay their loans at their own convenience, both in terms of time and location. Groups no longer have to meet close to a bank branch to deposit repayments. This means that members can meet closer to their businesses, and reduce the time spent on getting to meetings. In addition, more time can be spent by the loan officers in building a relationship with customers, as the time spent on receiving and recording payments is much reduced.
CBK first rolled out the agency model in the banking industry in 2010. In order to enhance the inclusivity of the financial systems, the bank has extended the agency model to the microfinance sector. This will increase the coverage for MFBs, making financial services more accessible.

A recent survey contacted by Biashara Leo ( BL) magazine in partnership with the Association of Microfinance Institutions – Kenya ( AMFI-K) on the microfinance industry showed that customers of both MFBs and MFIs considered the products and services of the said financial players to be reliable and easy to access. They also indicated a high level of satisfaction based on the fact the products were meeting their financial needs and expected quality but more importantly, that the turnaround time for service was high. From the same survey, the captains of the industry expressed optimism that the opportunities for growth and creation of competitive advantage outweigh the challenges. The risk exposure is still too high and the cost of operations, a heavy load and the industry is not excluded from the challenges facing the entire banking sector.

Financial services play a catalytic role in the efficient allocation of productive resources, thereby contributing to trade, investment and economic growth. They are therefore important in making financial services more affordable and secure, competitive and efficient. The sector is among the six key drivers of high growth identified in Kenya’s vision 2030. The others are : tourism, agriculture, manufacturing, wholesale and retail trade as well as business process outsourcing.
In order to become a regional financial services center, Kenya is undertaking some legal and institutional reforms to make the sector more competitive, while at the same time reforming the banking sector to facilitate the consolidation of small banks into larger and stronger ones. There are also efforts to streamline informal finance, SACCOs and MFIs.
Velocity of money has been declining at a slower pace in Kenya since 2010 compared with previous years. Unstable velocity implies unstable demand for money function over time which can inhibit the effectiveness of the monetary policy
The fall in velocity of money implies less cash being used in the economy – hence money is mostly ‘inside money’ which can support improvement in the transmission mechanism of monetary policy.

Promoting financial inclusion
Financial inclusion should be promoted because:
• Monetary policy cannot work effectively when a large proportion of the population is excluded from the market;
• Financial inclusion of the poor will solve the poverty problem sustainably. In addition, affordable financial services are important for raising incomes and improving lives through investment and capital inclusion;
• Build strong institutions to support the markets and foster financial system sustainability;
• Build capacity for future growth through finance- long-term and targeted finance.

Measuring Financial Inclusion
Financial inclusion can be measured through four lenses in order of complexity.
. Access- which refers to the ability to use available financial services and products from formal institutions. According to a recent survey by BL magazine, most customers rate MFBs and MFIs as highly accessible.
. Quality- which relates to the relevance of the financial service or product to the lifestyle needs of the consumer. Most customers in the same survey agreed that products and services offered by MFBs and MFIs to a very large extent meet their financial needs.
. Usage- which should go beyond the basic adoption of banking services and focus more on the permanence and depth of financial service and product use.
. Impact- which includes measuring changes in the lives of consumers that can be attributed to the usage of a financial device or service.
Thus several indicators have been used to assess the extent of financial inclusion known as index of financial inclusion (IFI). They include bank accounts per adult, geographic branch penetration, demographic branch penetration, geographic ATM penetration, demographic ATM penetration, demographic loan penetration, loan-income ratio, demographic deposit penetration, deposit-income ratio (or deposit-GDP Ratio) and cash-deposit ratio according to Conrad, et al.
It should be emphasized that mere ownership of a financial product does not result in financial inclusion. On the contrary, it is the usage of the financial product for economic self-reliance and growth which ultimately leads to financial inclusion. For example, opening a bank account by an individual is often treated as an indicator of financial inclusion.
But a better indicator of financial inclusion would be the usage intensity of the bank account by the individual as it is ultimately the quantum of transactions and interaction variety between the individual and the financial institutions(s) which reflects the value derived by the individual from participating in the mainstream financial system. The quality of the service and products should also be evaluated when measuring financial inclusion as majority of the low-income population are left dependant on non- performing, unsustainable institutions, which in-turn are themselves dependant on government subsidies. Consequently, measuring financial inclusion should be done in light of these views.

The Indicators of financial inclusion in Kenya through MFIs
Studies have shown that micro entrepreneurs below the poverty line experience lower percentage income increases after borrowing than those above the poverty line. They have also demonstrated that households below the poverty line tend to use their loans for consumption purposes to a greater extent than households above the poverty line; thus their income should be expected to increase at a slow rate.
A study carried out using secondary data obtained from an AMFI-K 2012 report and Mix Market website in 2013 showed the following landscape of the Kenyan microfinance industry;
The number of depositors grew by over 209% from 2007 to 2012, hence it can be concluded that microfinance institutions promoted financial deepening when reviewed from the perspective of number of depositors.
It also showed the loan portfolio steadily increasing over the same period.
This shows a reducing number of borrowers from the year 2009, and could be attributed to several factors like the conversion of big major MFIs into MFBs. These include: KWFT, Faulu Kenya and SMEP. These were major MFIs that contributed immensely to the growth of the industry. Their exit could have caused the decline in the active number of borrowers because of new regulations by CBK and shift in focus in terms of products they offer. This also could be as a result of high interest rates and lack of training on how to use the funds advanced leading to their misuse and as a result, resentment. This is in line with the conclusions that access does not mean usage, and as such, opening a bank account without accompanying training or marketing may simply result in additional costs for MFIs without any benefits to the community.
The MFI industry has been fairly financially sustainable as its returns on assets have been high.
This shows that the MFIs have played a key role in their financial intermediation process. They have been able to collect money that would otherwise be laying idle with depositors who are unable to access financial services and channel them into circulation by extending loans.
From the study findings, it can be established that there were generally more female borrowers than male borrowers.

MFIs play a big role in increasing financial inclusion in Kenya. They have increased the number of people who access financial services ( both depositors and borrowers ) and their growth impacts positively on the access and usage of financial services. The increase in assets (return on assets), loan portfolio and average deposits means that more Kenyans are able to access financial services from the MFIs due to availability of funds. It is evident also that the number of women customers is higher than that of men and this can be attributed to the fact that most women lack collateral to access credit from mainstream banks and they therefore opt for MFIs.
By and large then, MFIs play a crucial role in financial deepening and inclusion in Kenya and as such should be supported to grow further and reach many people for economic growth. This could be the reason why development agencies have been keen to support MFIs in the past.

The writer is a senior consultant with Integrity Management Advisory Centre (IMAC). Feedback may be given on :