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One step beyond:
Challenges and opportunities in promoting quality financial services in remoter areas

Susan Johnson, University of Bath, UK
Markku Malkamaki, MicroSave
Peter Mukwana, MicroSave
Kuria Wanjau, Cutea Consulting, Nairobi


October 2002

SARPN acknowledges MicroSave as a source of this document:
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Executive Summary


The last decade of microfinance practice, particularly in East Africa, has neglected rural finance. Support to the sector has concentrated on turning credit programmes into sustainable microfinance institutions (MFIs). This emphasis has produced a small number of MFIs that have either achieved financial sustainability or are close to achieving this. Their main product has been working capital loans provided through group-based lending methodologies. The result of this has been a focus on small-scale businesses and especially traders, who can manage these relatively inflexible products, and consequently also a concentration of their activities in urban environments and market centres. With outreach of between 150,000-200,000 they are, however, not yet reaching the bulk of poor Kenyans, most of whom live in rural areas.

At the same time there is evidence of innovation in Kenya in the form of managed ASCA programmes, Financial Service Associations and the emergence of ‘non-traditional’ SACCOs. While finance for agriculture remains a key challenge to the formal financial sector there is evidence from West Africa that some approaches to village banking based on community structures have achieved substantial coverage in rural areas, e.g. the MMD programme of Care in Niger which has reached approximately 400,000 women through low-level training and support to women’s ASCAs. In addition, the experience of the Caisse Villageoises programme of CIDR and FECECAM in Mali also suggest that significant outreach and sustainability can be achieved in these contexts.

The purpose of this paper is therefore to:

  • describe models of provision in Kenya that are reaching remoter areas or appear to have the potential to do so
  • analyse the characteristics of these models
  • present the outline of an action research project to promote rural financial service provision.
Reaching further out

Three models of provision are described and discussed:

  • The managed ASCA model has outreach of approximately 30,000 in Central Kenya. Management services are provided to women’s groups for a fee. Women save in groups of approximately 30 and take loans from the fund – an accumulating savings and credit association (ASCA). The products are short-term loans (at 10% per month) and longer-term loans of up to two years (at 17% flat per annum). The ASCA manager charges a fee based on the size of the overall loan fund. The managers travel to the groups once a month and help them run their operations. They also assist in following defaulters. The costs of this model are kept low because the managers use public transport, rent modest offices and employ diploma level staff.

  • Financial Service Associations (FSAs) are a model that KDA has used to reach further into rural areas. Members buy shares, which are non-withdrawable and used for on-lending. The model also allows for a voluntary savings facility. Starting with at least 100 members the FSA elects a board, employs a locally recruited manager and cashier and commences lending. Interest rates of 10% per month help the fund to grow and costs to be covered. Salaries tend only to rise as the FSA is capable of paying. While the expectation was that once the system was set up and staff trained, the FSAs would be self-sustaining, this is only proving possible in a few cases and there is need for ongoing support. KDA is now examining models of provision of affordable support through management contracts and an apex option.

  • Non-traditional SACCOs. With SACCO liberalisation SACCOs are a convenient regulatory form that is increasingly being used to legitimise saving and on-lending. In some cases this is being used as an apex body for groups. Kieni Revolving Fund is such an example and services farmers and young people in the semi-arid division of Kieni, Nyeri District. However, non-traditional SACCOs are also emerging to serve small-scale traders and businesses. Ebony SACCO in Nakuru is of this form, but in this case has started to use groups because it found that individual lending with guarantors was problematic and group systems were able to better manage transactions and default.
Analysis and discussion

The common feature of these models is that they have elements of user-ownership. Community-based microfinance institutions (CBMFIs) are able to lower costs through the mobilisation of member’s savings, retention of interest and profits, low overheads and voluntary inputs of labour into management and governance. In addition these systems are often more flexible and members have the ability to negotiate repayment schedules when problems strike, thus enabling them to more effectively manage livelihood shocks and vulnerability.

However, CBMFIs at the same time often suffer from poor management and governance. Where members are less well educated, the skills and experience to run these organisations effectively is often lacking and powerful members may manipulate them to individual advantage. Moreover, the more complex the products on offer, the more sophisticated the skills required for effective management and oversight. Hence, simple ROSCAs allow for transparent systems of management and oversight: all know what the payout is supposed to be, so that if it is not reached they know someone has not paid and action needs to be taken. Moreover, the end of a ROSCA cycle or ASCA termination acts as a transparency and control mechanism permitting problems to be addressed and reformation to take place under revised arrangements. The question arises as to whether it is possible to provide low cost support and supervision services to improve the management and governance of these types of organisation in order to improve rural provision.

The different models can also therefore be analysed in terms of the way they provide support services. The managed ASCA approach is one of private sector based consultancy on a fee for service basis, and this is a model with which KDA is experimenting as a means of providing long term support to FSAs. The question is how to balance the quality of the service and the price in a way that produces improvements in returns that will pay for the service and increase returns to shareholders.

The second model is that of a user-owned apex in which groups or FSAs pay a fee which might be based on either revenue or profits to fund the provision of a range of support services including training, support and supervision. Non-traditional SACCOs can also be conceived as apex bodies that are providing a structure of support service to groups. In this case the costs of the service are implicit in the interest on funds and fees charged.

Outline of an action research project

The opportunity exists to learn from these initiatives and attempt to address the challenges of management and governance through making available this experience along with toolkits aimed at improved management and governance. There are clear opportunities to improve the financial transparency of these models through the development of management information systems and standards. The project would therefore find ways of cost-effectively improving these systems and disseminating them to a wider audience that is also attempting to tackle rural finance provision. This would therefore aim to develop the broader infrastructure of support to CBMFIs.

The purpose of an action research project is therefore to improve the provision of quality demand-led financial services in rural areas and its specific objectives would be to:

  1. Research, analyse and document models of sustainable financial service provision that are reaching further into rural areas.
  2. Improve the quality of affordable supervision and support services available to CBMFIs.Examine the implications of the different models of provision, support and supervision for regulation and supervision.
This would be achieved through working with a small number of main action research partners based in Kenya to generate improvements to their systems and how these perform. It would also seek to work with a wider network of partners in Kenya, Uganda and Tanzania to provide a forum for learning and dissemination on rural finance through a series of workshops. Organisations would be able to follow the developments in the project, test toolkits and present their own experience.

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