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Studying the Past, Looking to the Future: The Future of Microfinance in Africa

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The Future of Microfinance in Africa

Interview by Jennefer Sebstad

The Kenya Rural Enterprise Program (K-REP) started as a USAID/Kenya project in 1984.With continued support from USAID, it became an NGO in 1987 and transformed into the first regulated microfinance bank in Africa in 1999. In an interview for this blog series, Kimanthi Mutua, the CEO of the K-REP Group and a leading proponent of financial inclusion in Africa, reflected on the future of microfinance in Africa. The following excerpts are a continuation of the interview. Read part one of the interview here.

Q: Where do you see the microfinance industry going in Africa?

A: Until very recently, the provision of microfinance services was seen to be an exclusivity of microfinance institutions (MFIs). The belief was that other types of institutions, commercial banks and so on, did not have the interest, commitment, ability, or values to really stick with providing microfinance services. This view is being challenged by the emergence of the new financial inclusion paradigm. This paradigm promotes policies that enable a variety of institutions to provide financial services to sectors they were previously unable to serve through new distribution channels and/or partnerships with financial institutions. In the past, everyone thought microfinance institutions were the only ones that had the technology and ability to build distribution channels to reach low-income and poor people. You had the group-based approach and other methodologies that enabled us to reach low-income entrepreneurs and poor people to provide them financial services. But technology came in. And Kenya is an interesting country to learn about the impact of these new technologies, like mobile money and agency banking. When that technology came in, it suddenly enabled even the biggest of banks to reach the same segment that had exclusivity to MFIs. This is one fundamental change with the financial inclusion paradigm. And because these bigger financial institutions have a lot of resources, they are able to procure these technologies and have a much bigger impact in terms of outreach.

Financial inclusion policies are also expanding the types of institutions that can provide financial services in any economy. Previously, financial services were an exclusivity of regulated financial institutions such as banks and so on. Now those policies are bringing in players that no one would ever have thought about, like cell phone companies, to provide financial services and channels for financial services.

They just announced the profits of Safaricom. They were the biggest for African companies south of Sahara and north of Limpopo – and those profits were largely driven by M-Pesa. M-Pesa started as a money transfer system; but today, it is a much more complex thing. It is two things. First, it is a channel for the delivery of financial services and a settlement system of sorts – with most, if not all, banks linked in. Second, it has a lot of added products – not only those that Safaricom provides but that any other institution can hook on to provide. This is instructive of what the future will likely look like. The provision of microfinance service will come from many different players.

Q: Your description of the paradigm shift with financial inclusion is really interesting. To what extent has K-Rep Bank embraced the digital finance platform?

A: Today in Kenya, there is no bank that can survive without having the digital or mobile phone platform to interface with its customers. With specific reference to K-Rep Bank, it embraced digital, and right now a very good percentage of the banking services are available digitally over the mobile phone. The group-based methodologies we used to follow have been changed significantly because of digital technology. People can now repay and receive their loans through mobile phones. It’s no longer necessary to have those laborious weekly meetings, which were primarily to make sure that everybody repays their loans, because now people can do that on their phone. But that is not only for K-Rep. Every bank has its digital platform. Of the 43 or so banks in Kenya, I think most are linked to Safaricom’s M-Pesa system.

Q: What’s happening with the credit groups? Have they dissolved?

A: No, the groups have not dissolved. They are still there. They use their time differently. Previously, they used to spend 90 percent of their time to do credit administration on behalf of MFIs. For a long time we wondered how long we could continue to depend on groups to do credit administration functions that MFIs should be doing. They were assessing loans, monitoring loan repayments, and doing the collection. MFIs became sustainable because they externalized a lot of their services to the groups. We worried about how long we could continue to depend on this, but technology provided the answer.

Now the groups meet for things that are of interest to them, not of interest to the microfinance institution.

Q: What about the savings group movement in Africa? How is that playing out in Kenya?

A: That is quite a significant movement, especially in the Francophone countries. My own thinking, based on what I see, is that this, too, is going to be integrated. Credit got integrated first. I think the savings element is also going to get integrated. Now the most important part of the savings group culture is basically the peer pressure and peer encouragement to save frequently.

There is a very interesting turn on this. It is moving from savings per se, into investment clubs. K-Rep and many other MFIs and banks in Kenya now are focusing on turning savings groups into investment clubs. So investment clubs are taking over from savings clubs.

Q: What are your thoughts on the role of donors in the past compared to the role of donors today?

A: That’s a very interesting question. Donors kind of pulled back when the whole thing started taking off on its own. But for me, I think they pulled back prematurely purely for lack of knowing what else they could do. They pulled back because we all preached that donors should not give subsidies and grants – let these institutions develop a new culture. That was all well and good. I think there is a need for donors to come into the new initiatives that we really don’t know enough about. But defining donor interventions is what is difficult. It requires donors to come together the way they did in the past – to start debating, thinking, and talking. For me, the first thing that donors need to do, which helped a lot in the early days of the transformation, is to begin to have these local discussions. What helped microfinance really grow was global forums where people came to talk and to debate issues. That evolved into concrete ideas on which direction to take. That stopped. And because it stopped, we’ve kind of become blank about what else can be done by donors.

I think donors have a very important role in dealing with some of the questions that are arising. For example, what type of ownership should we think about for MFIs? We’ve dealt with the questions of transformation and funding, but the question of ownership is unresolved. Should they be local or foreign, public or private? Should they be NGOs or private companies? And so on. Investing in research, discussions, and exchange of ideas can make a major contribution to what happens. Another question is about microfinance investment vehicles. What is their future? How long should they be there? Are they the most appropriate vehicles for long-term investors in MFIs, as opposed to bridging investors at the transformation stage? These are very interesting questions to work on and discuss. There also are questions about products with the new emerging distribution channels, new players, and changing policy environment. How do you help develop products that reach into rural sectors, small-holder farmers, housing, and so on? How do you develop products that can actually be delivered through these new distribution channels? I think product development remains a challenge.

There is still a big role for donors. But for that role to be defined there needs to be dialogue. There was very good dialogue at first and, for me, dialogue is what informed all of us. But the dialogue has sort of died down. We seem to be sticking to what we discovered in the past and what we already know. We all need to push on how to discover new things. We shouldn’t just rest and say it’s all done. It’s not. There are still many questions.

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