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International Conference on Rural Finance Research Moving Results into Policy and Practice

Egerton University-Kenya. Rural Financial Services in Kenya What is working and Why? -Betty Kibaara-. International Conference on Rural Finance Research Moving Results into Policy and Practice FAO Headquarters Rome, Italy 19-21 March, 2007.

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International Conference on Rural Finance Research Moving Results into Policy and Practice

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  1. Egerton University-Kenya Rural Financial Services in Kenya What is working and Why? -Betty Kibaara- International Conference on Rural Finance Research Moving Results into Policy and Practice FAO Headquarters Rome, Italy 19-21 March, 2007 Theme: Improvement in operational Management of Rural Finance Institutions

  2. Rural Financial Services in Kenya • Formal organized commercial banks concentrated in the urban areas- in 1990’s most multinational banks closed rural branches • An array of informal financial systems created to fill the vacuum • Only 20% of the population have access to bank accounts in the rural areas. • Rural finance has been recognized and fast tracked under the Strategy for Revitalizing Agriculture • It is against this background that we conducted a research on selected rural finance models

  3. Table 3: Source of agricultural credit, 2000 and 2004

  4. Presentation Outline • State Owned/Government Model • Community Owned Model • Village Banks • Mbeu Savings Association ‘Bank under a tree’ • Donor Credit Guarantee • Agricultural Input Stockists • Credit Input Supply Voucher System • Emerging Indigenous Banking Model • Beach Banking Objective understand the operations, constraints, opportunities and possibility of replication

  5. State Owned/Government Led Model: - Agricultural Finance Corporation- • Semi-government organization- budgetary allocation • Targets large scale farmers • Collapsed in the 1990’s and revamped in 2003 • Offers, seasonal, developmental loans, value addition loans, and short term loans to agricultural input stockists Challenge:-Loan Recovery, inefficiencies and financial sustainability Opportunity to diversify from retail to Groups/Wholesale lending

  6. Donor Credit Guarantee Model -Agricultural Input Stockist- • Model involves the Donor, an NGO, an input stockists and input Manufacturer. • Strengthen the creditworthiness of the agricultural input stockists who lack capital. • NGO trains the stockists and link them up with manufacturers/distributors of inputs-get inputs on credit • Donor guarantees to pay 50% of defaulted credit Challenge: limited guarantee -$40,000 Scaling up: The model has attracted the Agricultural Finance Corporation Now lending short term credit ( Ksh. 150,000 to Ksh.500,000)

  7. Donor Guarantee -Credit Input Supply Voucher System- • Provision of agricultural inputs using vouchers reduce diversion- in Ahero Rice Irrigation Scheme • Involves a donor guarantor, an MFI, Savings and Credit Co-operatives (SACCO), Input stockists, Government and the private sector • In 2005, disbursed Ksh. 6.7 million 600 farmers Challenge: cohesiveness of all actors in the value chain Opportunity exist for scaling up to other irrigation scheme Replication: Already replicated in Bunyala Rice Irrigation Scheme

  8. Emerging Indigenous Banking Model -EquityBank- • Bank owned by locals • Principal- take banking services closer to the people after the multinational banks pulled away from the rural areas- FIXED and MOBILE BANKS • Rural clients account for 68% of clients • Low transaction charges –No ledger fee, take digital photo. • Total clients -1 million ( over 20% of all the total deposit accounts in Kenya) • Borrowing clients, 21% Challenges : Infrastructure, insecurity Replication: a number of banks have have set up rural branches e.g. Family Finance, Barclays bank and Kenya Commercial banks

  9. Community Owned Model Financial Service Association ‘Village Banks’ • Owned by the local community- membership through shares • Low densely populated areas • Managed by management companies- Krep Development Agency at a fee • Donor assistance with a clear exit strategy- Institutionalization and capacity building • 70 village banks, 70,000 savers, Ksh. 82 million shareholding • Proportion of client obtaining loan, 38%

  10. Owned by the local community- membership through shares Low densely populated areas-promoted by the church One Management office in the city 4-5 credit officers - use Motor bikes to visit the groups Offers savings, loans and money transfer 10,000 members, Ksh 30 million savings % borrowing clients, 30% Challenge: Insecurity, poor road infrastructure, regulatory issues Replication: other NGOs promoting the model Community Owned Models -Mbeu Savings Association- ‘Bank under the tree’

  11. Beach Banking Model • The model serves the unbanked fishermen along Lake Victoria beaches • Members formed a savings and credit Co-operative (SACCO), an MFI oversees its management. • 8 service points ‘bank’ along the lake- Savings and loan facility • Only 30% of the members borrow • Most innovative product are the Market Day Loans as low as US $ 3 Challenge: Migratory nature of fishermen, insecurity, regulatory Opportunity: so far only serving 3,000 fishermen….potential 12,000 Replication: piloting along the coastal region

  12. A Comparative Analysis of the Rural Finance Models

  13. Current ScenarioOutreach (no. of clients) and Financial Sustainability Outreach frontier High Community owned models Village banks and Mbeu savings Private commercial bank -Emerging indigenous banks- Outreach ( no. of clients) Sustainability frontier Beach banking Credit input Supply Voucher System Govt. led model: AFC Low Low Financial Sustainability High

  14. Future ScenarioOutreach (no. of clients) and Financial Sustainability Outreach frontier High Community owned models FSA and Mbeu savings Private commercial bank -Emerging indigenous banks- Govt. led model: FutureAFC Outreach ( no. of clients) Group lending Beach banking ??? Govt. led model: AFC Credit input Supply Voucher System Low High Low Financial Sustainability

  15. Policy Implication • The government policy of the state financing is unsustainable in the long run. In addition, the state owned financing institution focus only on credit aspect. • Rural finance policy in most cases have addressed the issue of credit but lack of a savings facility is a bigger constraint than credit. Rural finance policy should be comprehensive. • Policy or intervention targeting only a single activity in the value chain such as supply of credit may have limited impact as compared to an intervention that target the whole value chain. • Policy interventions aimed at promoting the community owned models are likely to be successful and have greater impact. • Government should promote infrastructure to enable the private sector such as banks to penetrate the rural areas

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