What Is Microfinance?

1. Banking for Smallholders and Options for Financial TransfersPresented During the first Green Water Credit Stakeholders workshop, Kari 11th -12th October , 2006 By Moses Banda

2. What Is Microfinance? • Microfinance is the supply of loans, savings, and other basic financial services to the poor. People living in poverty, like everyone else, need a diverse range of financial instruments to run their businesses, build assets, stabilize consumption, and shield themselves against risks. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services. E g. Payments For Environmental services.( PES) By Moses Banda & Benson Kimithi

3. What Is Microfinance-Cont? • The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal. Credit is available from informal commercial and non-commercial money-lenders but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and mutual insurance societies that have a tendency to be erratic and insecure. By Moses Banda

4. What Is Microfinance-cont? • Financial services for the poor have proved to be a powerful instrument for poverty reduction that enables the poor to build assets, increase incomes, and reduce their vulnerability to economic stress.? However, with nearly one billion people still lacking access to basic financial services, especially the very poor, the challenge of providing financial services to them remains. Convenient, safe, and secure deposit services are a particularly crucial need. By Moses Banda

5. What is K-rep Bank? • K-Rep Bank is a licensed commercial bank that specializes in microfinance. It is the first micro-finance commercial bank in Kenya. Microfinance is a development intervention that has evolved overtime to operate on a commercial viable basis and aims at providing banking and financial services to low-income and poor people. • The bank is distinguished from other commercial banks or financial institutions, by its social mission of addressing poverty by supporting employment, income generation and savings mobilization activities of low-income & poor people, as a means of building an asset base for poor house-holds. By Moses Banda

6. Share holding • K-rep bank major share holders • International Finance Corporation (IFC) • The African Development Bank (ADB) • The Netherlands Development Finance Corporation • Treodos • Shore Bank • Shore cap international • K-rep group By Moses Banda

7. Products • Main Investment Products: • Microfinance Loans. • Retail Loans. • Wholesale (SACCO) loans. • Special Projects. • Deposit Products i.e. Savings Accounts, Current Accounts, Term Deposit Accounts, Foreign Currency Accounts, Investment clubs savings accounts, Mshahara Account etc By Moses Banda

8. Experience of outline principle of microfinance • Our experience and the outline principle of microfinance can be applied as a financial intermediation in other sectors of the economy. Some of the ideas that we have are the following:- • The approach should be a market based mechanism because they ensure sustainable provision of services. • What is more important here is that the development of market-based solution requires donors to build up the infrastructure, institutions & systems for such solutions. By Moses Banda

9. Experience of outline principle of microfinance-cont • It is equally important to identify what aspect of these solutions are “public goods” and seek appropriate donor intervention to put them into place because market-based approaches cannot effectively subsidize/finance aspects that are of public good nature. e.g.. – Roads infrastructure. • Donors/Governments are also important for changing culture and public perceptions that certain services can only be provided by Government and public institutions. The government can only create the conducive environment for private investments to thrive. By Moses Banda

10. Does Donor crowd out market based approaches • In essence, donor is cheap money – provided through grants or concessionary loans. There is some evidence that this cheap money can “crowd out” efforts by communities towards more market based approached. For example, in Kenya, there are cases of peri -urban communities organizing themselves to self-finance water projects, and saving upwards of 20% of capital costs. By Moses Banda

11. Does Donor crowd out market based approaches.. Cont • With arrival of “free” money or in kind donations, mobilization of community savings plummeted. Likewise, some organizations that seek to facilitate market-based and “bottom up” approached have noted difficulties entering markets in countries where grant-based (whether through bilateral agencies or NGOs) approaches are dominant. By Moses Banda

12. How can Donors effectively lever market based mechanism? • In recent years, calls for guarantees and the creation of revolving funds to stimulate investment in the water sector have increased, resulting in the creation of such funds in many middle income countries. For small towns, which pose considerable governance and capacity risks, these mechanisms could be very useful to increase the attractiveness of water and sanitation investments, particularly to support local utilities, small scale private entrepreneurs, and financial intermediaries (whether domestic Banks, Micro-credit funds, or if regulation allows NGOs).. By Moses Banda

13. How can Donors effectively lever market based mechanism? ..cont • The practical application of these mechanisms can be challenging. Given the poor levels of capacity in governance, issues of inflation, debt ceilings, Currency risk , High cost of guarantees , Revolving funds require servicing in order to revolve hence may be an issue for many utilities. The more reason why we need partnering and synergy between the Government, the private sector and the Donor community. By Moses Banda

14. Should Donors be used as a market-based mechanism? • In conclusion therefore the experience of K-rep bank in financial intermediation can be applied in other sectors of the economy, and Green Water Credits programme is not an exception. K-rep Bank will be willing to be part of this initiative. By Moses Banda

15. END OF PRESENTATION Thank you Q& A By Moses Banda