Microcredit Turns into Major Headache in Kenya
Tuesday, November 15, 2005
The power of microcredit to pull people out of destitution has been celebrated around the world during 2005, designated the “International Year of Microcredit” by the United Nations. In Kenya, however, the concept of microcredit risks losing its bloom.
This follows concerns about a number of self-described microfinance institutions that have sprung up across the country over recent years, and which seem more intent on exploiting their clients than helping them work their way out of poverty.
“We have been holding press conferences, highlighting our concerns regarding the mushrooming of bogus microfinance institutions, as well as taking out adverts in the press telling people what to look out for when seeking microcredit,” said Kimanthi Mutua, chairperson of the Association of Microfinance Institutions (AMFI).
AMFI serves as an umbrella body for 23 of the approximately 50 microcredit groups that operate in Kenya.
However, few measures govern the sector overall: an office, start-up capital and a licence from the city council permitting someone to run a money-lending business are all that is needed. With these things in hand, various organisations have set up shop under the microfinance banner, but operated as banks instead, taking deposits other than those for microloan repayments.
The Banking Act precludes any institution not licensed under the Act from soliciting or accepting deposits.
Kenya Akiba Micro Finance was one of the culprits, having taken deposits of almost $7 000 from some of its clients.
Certain deposits were reportedly taken on the understanding that Kenya Akiba would buy minibuses for customers who wished to get into the taxi business; however, the minibuses either went undelivered, or were repossessed. Another client was quoted describing how she paid a deposit to secure a loan that was never forthcoming — while it was impossible for her to withdraw the deposit.
Earlier this month, the Central bank of Kenya closed the organisation’s offices as part of a crackdown on dubious financial institutions. The move followed an advertising campaign by the bank, warning groups not licensed under the Banking Act against using the word “finance” or its derivatives, like “microfinance”, in their trading names to solicit deposits from the public.
The closure provided little comfort to Kenya Akiba’s distraught clients, who are now trying to meet President Mwai Kibaki in a bid to have him intervene in the matter, and arrange for their deposits to be returned to them.
AMFI also sees the closure as too little, too late.
“Even though the state has moved in to act now through the CBK [Central Bank of Kenya], it failed to take action in good time,” said Mutua.
A Microfinance Bill was put forward in 2002, but has yet to receive the green light from the Cabinet and Parliament. “The gap left by the lack of a Microfinance Bill has created a gap for quacks to operate. If such a Bill was in place, the Akiba incident would not have arisen,” said Mutua.
The unfortunate events surrounding Kenya Akiba notwithstanding, microcredit enthusiasts argue that it provides a valuable service to the poorest of the poor, who may find themselves locked out of conventional banking systems.
Traditional banks typically require collateral before issuing loans, something poor people seldom have access to.
However, microcredit schemes may allow for small amounts to be loaned without conventional collateral, such as property. Instead, several persons may serve as an alternative form of collateral in cases where the loan is issued to a group. If a member of the group defaults on their share of the repayment, the others step into the breach — and also try to pre-empt defaulting through putting pressure on group members.
“I, through our group of ten women, have got loans from these firms, which have benefited me a great deal,” says microcredit recipient Njeri Kamau.
“Since five years ago, I have been applying for loans and repaying them religiously. I have managed to put up a three-storey rental flat in Nairobi. This has now become my source of income.”
Mutua claims that microfinance groups assist about two million of Kenya’s 30-million-strong population. More than half the citizens in this East African country live on less than a dollar a day, according to government statistics.