Studying the Past, Looking to the Future: K-REP: From a USAID-Funded Project to Africa’s First Microfinance Bank

K-REP: From a USAID-Funded Project to Africa's First Microfinance Bank

Interview by Jennefer Sebstad

The Kenya Rural Enterprise Program (K-REP) started in 1984 as a USAID/Kenya project. With continued support from USAID it became an NGO in 1987 and transformed in 1999 into the first regulated microfinance bank in Africa.  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 how K-REP began and transformed into a bank. Excerpts from that interview follow.

Q: Can you tell us about your current role in K-REP?

A: I am the CEO of the K-REP Group in Kenya, a holding company for several microfinance entities: a microfinance institution for housing finance, one for smallholders, and another for village banks. It also includes our NGO, the K-REP Development Agency, and our flagship, the K-Rep Bank. I was the managing director of the K-Rep Bank for 12 years and retired three years ago.

Q: How did K-REP get started?

A: K-REP started exactly 30 years ago when I was 32 years of age and I’m now 62 so that is quite a nice period to take a look back and see what has happened. K-REP started as part of a bigger initiative by USAID to develop the private sector in Kenya in the early 1980s.  Part of that strategy was to develop small-scale businesses, particularly in rural areas.

The first K-REP initiative (then known as the Rural Enterprise Program with an initial grant of about $5.3 million for 5 years) was to seek out and support local NGOs that had projects to develop small businesses. These were mainly credit programs for the development of small-scale businesses and community based enterprises run by women, youth, and other rural groups. We provided sub-grants to local NGOs.

An interesting part of the project was the focus on learning. The project had a mandate to research and develop methodologies, systems, and approaches for supporting small enterprises, as well as to link with other programs from all parts of the world that were trying to do the same thing. For me, I think this was the biggest value of the project. Those linkages to Asia, particularly Bangladesh, and Latin America added quite a bit of value in terms of skills and knowledge on how to transform these small enterprise development projects.

The early methodologies were trying to provide everything – credit, technical assistance, training, advisory services – all in one basket without much attention to the institutions that were providing those services. Sustainability of those institutions was not a major concern.

From 1986 to about 1989 there was increasing attention on how these institutions could become more effective in providing service. This evolved into a concept known then as the “financial systems approach” and the creation of sustainable institutions called “microfinance” institutions (MFIs).

The USAID PISCES and ARIES projects contributed to the process by bringing professionalism to local institutions in the areas of credit management and credit administration. They developed tools and skills for managing credit portfolios and promoted exchange visits in Africa and elsewhere. They got institutions to begin talking and sharing. With its own network and knowledge of what was happening in different parts of the world, USAID/Kenya supported K-REP in identifying and understanding the global initiatives that were taking place.

Q: When did K-REP really begin to gain traction?

A: We really gained traction in 1989 and the early 1990s using the knowledge of institutions worldwide that were doing much better than the groups K-REP was supporting in Kenya.

In 1989 K-REP started its own microcredit program, Juhudi (‘effort’ in Swahili), building on the experience of global institutions and the best lessons learned. It not only served as K-REP’s program, but became the center for other institutions that wanted to learn and model their own operations. Of course that met with some resistance from the sub-grantees. They said, “You were created to help us, now you are the competition.” But in retrospect, that change really made the whole sector in Kenya change. If you look at the major players today – KWFT, Faulu, SMEP, CADET, PRIDE – they were all beneficiaries of the earlier effort one way or another.

One of the main objectives was sustainability. How could K-REP live beyond the support of any donor? We looked at two models: the Bangladeshi model where the organization grows into a large NGO and continues to deliver microfinance services; and the Latin American model where the organization transforms into a company and later a regulated financial institution. Bangladesh had a fairly unique situation in terms of donor support, something that didn’t exist in Kenya. We chose the Latin America model (financed by shares and deposits, basically a regulated finance institution) in 1996 and accomplished our goal in 1999.

Q: What were some of the policy issues you faced in the process of transformation?

A: Boy, that’s the course I teach in Boulder! The challenges were stiff. We were the first NGO to transform into a regulated commercial bank. Therefore, there was no experience on the part of regulators or the NGO community on how to manage that transformation process.

USAID had one precedent: BancoSol in Bolivia. But USAID still had many questions. We were asking for disposal of assets created by grants to a newly formed company that would now own those assets, and get dividends and value from them.

USAID decided to help. It had developed a very strong team of professionals who understood and realized the vision of microfinance for the future. They took a decision to help this process. Even though K-Rep Bank would be a for-profit organization, its objective was still development. It wasn’t going to distribute its profits but plow them back into development work through a non-profit, a K-Rep holding company. That was the principle that allowed us to make the transformation.

Practically every donor shared USAID’s concerns. But the movement managed to develop through a clique of professionals with similar thinking who were working for government organizations that provided funds, as well as NGOs. Together they decided to change the rules of how donor funds could be used to support this transformation. If that hadn’t happened, the sector would not be where it is today.

On the regulatory side, it took considerable lobbying and discussion, and work with the Central Bank – getting those bankers exposed to other parts of the world. USAID provided funding to send regulators to Bolivia to see firsthand what had been accomplished. After that, regulators gave their support. Changing the policy arena was a key accomplishment for K-REP. It laid the groundwork for special regulations for microfinance institutions that allowed others to transform.

Q: What have been some of the other key accomplishments of K-REP?

A: Prior to transformation K-REP played a very, very big role in capacity building, not only in Kenya but across many countries in Africa. In Tanzania, for example, K-REP had a major role, consulting with the Bank of Tanzania to develop a regulatory framework to allow MFIs to become regulated financial institutions. In Uganda we had a lot of discussions and workshops that informed their policy. And today, Kenya is a very vibrant market. In addition to the traditional microfinance institutions that transformed, other entrants have come into the market as greenfield microfinance institutions. (These are newly created local institutions set up by a regional or international network or holding company. They can be considered a type of franchise, where the holding company backstops operations, provides standards for policies and procedures, and co-brands the subsidiaries.)

Also, K-REP has never stopped experimenting. When we transformed into a regulated financial institution, the NGO remained and continued to develop new approaches, new methodologies, and new systems. It started looking at the other sectors that could deepen its outreach into areas that microfinance could not reach. This led to the creation of the other K-REP microfinance entities that focus on housing, small-holder farmers, and village banks. The NGO also continues to build capacity in other countries in Africa.

Q: What are some of the key factors in K-REP’s success?

A: I cannot say this enough times. The fact that it had what I’d like to call a permissible environment to experiment and try things. That environment was provided by both the funding and support that it got from USAID. If you really look at it, $12 million in the 1980s and 1990s (USAID support from 1984-1996) to experiment and try new approaches in Africa was significant. K-REP had the resources it needed to experiment. Second, it had support from USAID for cross-learning.

I think those two elements count a lot for the relative success that we have had. Of course, other donors also made contributions, especially the Ford Foundation and DFID. But it all started because of USAID.

If you have that initial start, then I think it puts you into a market position to innovate. Of course, you also can talk about the people in K-REP; all of them very excited and committed to development. The initial leadership by Fred O’Regan was an asset. And the support we had from numerous other USAID initiatives like the GEMINI, ARIES, and PISCES projects, gave us wider exposure that helped us think beyond Kenya, and culminated in building a global network. K-REP was a key part of the network that helped to develop and shape the sector.

For me, those are the really key factors. You can mention many others, but if you don’t have resources and a network to do a lot of things, then it is hard to make any significant change.