572Cotonou Benin Microfinance Forum by fanzhongqing

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									THE STATUS OF THE MICROFINANCE
       INDUSTRY IN KENYA

           PRESENTED
                  AT
  THE 5TH AFRACA MICROFINANCE
               FORUM
        2ND - 4TH JULY 2008
        COTONOU, BENIN

               BY
       CASSIAN J. NYANJWA
     CENTRAL BANK OF KENYA
                                 1
     PRESENTATION LAYOUT

   Geographic Location
   Key Economics Indicators
   Financial Sector Landscape
   MSE Sector
   Financial Access
   Microfinance Industry in Kenya
       Definition
       Institutional Forms
       Policy and The Microfinance Act
 Challenges and Constraints
 Way Forward                             2
Africa




         3
 EAST AFRICAN COMMUNITY
 (KENYA, UGANDA, TANZANIA, BURUNDI & RWANDA)



Member Countries
  Kenya
  Uganda
  Tanzania
  Rwanda
  Burundi

Area: 1.8 m Sq Km
Population: 82 m

                                               4
Area: 582,650 Sq Km
Population: 37.2 million   5
KENYA: KEY ECONOMIC INDICATORS


Indicators                       2002          2004       2007
Economic Growth Rate              0.5%          4.9%       6.1%
Per Capita Income                 $489          $499       $538
Average Annual Inflation          2.0%          11.6%     14.5%
91-day Treasury Bill rate         8.4%         8.04%      6.87%
USD Exchange Rate             KSh.78.7      KSh.79.3    KSh.69.6
Commercial Bank                  13.5%        12.25%     13.32%
Lending Rates
Overall Poverty                  52.3%           56%      45.9%
             Source: Economic Survey and Central Bank
                                                                   6
           Kenya’s Financial Sector Landscape



                                  Financial Landscape in Kenya


           Formal                        Semi-Formal                  Informal


     Commercial Banks
Non Bank Financial Institutions              DFIs                  Money Lender
Mortgage Finance Institutions               SACCOs                    ROSCAs
     Building Societies
       Forex Bureaus
                                   Microfinance Institutions           ASCAs
      Capital Markets              Hire Purchase Companies       Relative & Friends
         Insurance                      Financial NGO’s
          Pension




                                                                                      7
          Financial Sector Landscape

Financial Sector Institutions         Dec. 2002              Dec. 2007
                                     (Numbers)              (Numbers)
Commercial Banks                    45                  43
Non-Bank Financial Institutions     3                   1
Building Societies                  4                   0
Forex Bureaus                       48                  96
Mortgage Finance Institutions       2                   2
SACCOs                              4020                5122
Development Finance Institutions 5                      6
Microfinance Institutions (AMFI)    14                  34
Informal Providers                  Numerous            Numerous

                     Republic of Kenya: Economic Survey, 2007 and Central Bank
                                                                                 8
               Why Access?

 Consensus that there is constrained access to
  financial services and products
 Mainly to economically active poor, low-
  income households and Micro- and Small-
  Scale Enterprises (MSEs)
 Measurement of the magnitude of the access
  problem
 Policy implications and progress made on
  access
 FinAccess Survey Study, 2006

                                                  9
Micro and Small Enterprises (MSEs)Sector

 Businesses in both formal and informal sectors, classified
  into farm and non-farm categories employing 1-50 workers
 Provide most sources of employment creation, income
  generation and poverty reduction to majority of the
  population
 SMES employed app. 3.2m people in 2003 and accounted for
  18% of national GDP (African Economic Outlook 2004/2005)
 90% MSEs lack access to credit
 80% of population live in the rural areas and engaged in
  agricultural activities and MSEs
 Est.12.8% of rural households have access to credit from
  SACCOs and banks
 Est.13% have access to saving                                10
            Financial Access Strand


                   Financially Included - 62%

       Banked 19%
                                                                   Financially Excluded



           19             8                  35                               38




  0%      10%       20%       30%      40%        50%   60%        70%      80%        90%        100%



Formal                    •Formal Other                 Informal                   Unbanked

Regulated banks,          SACCOs and MFIs                                          No formal or
                                                        ASCA
building societies        (microfinance institutions)   (Accumulating              informal
or Kenya Post Office Savings Bank                       Savings and                financial
                                                        Credit                     products used         11

                                                        Associations) and
Key Factors Limiting Access
Main reasons for low usage of formal financial services:
       Low Incomes
          About 50% are classified as poor & have no incomes worth
           banking
       Cost of financial services
          Access barriers (opening/minimum balances)
          High transaction costs (account operating cost, physical &
           time)
       Availability of informal (cheaper) alternatives
          Shopkeepers/suppliers: credit
          Friends/family: saving, credit, insurance, remittances
          Matatus/buses: remittances
       Unavailability in some regions e.g. North Eastern

                                                                        12
•Infrastructure
 development
•Population
 density
•Urbanisation
•Climatic zones
 and agricultural
 activities
•Socio-cultural
 factors            13
 Financial Sector Development – Vision 2030


 The 3 pillars of the Financial Sector Development
  objectives are:-
      Ensure STABILITY : Through policy and
       infrastructure development.
      Foster EFFICIENCY : By encouraging increased
       competition and technological development.
      Promote ACCESS: By providing an enabling
       environment.
                                                      14
         Microfinance - Definition
 Microfinance - provision of financial services and
  products, mainly credit facilities, savings channels, money
  transfer services, micro-insurance to low-income
  households and MSEs in both rural and urban areas, while
  accepting a wider variety of assets as collateral
 Characteristics:-
    Short repayments periods
    Relatively high interest rates (not always)
    Graduated increase of loan size as incentive for
      repayments
    Sustainability
    Non conventional collateral/locally based collaterals etc.

                                                              15
Institutional Forms for Microfinance
         Businesses in Kenya
Microfinance business in Kenya is carried out by
different institutions with varied institutional
forms, including:-

   Companies ( including commercial banks)
   Co-operative Societies
   Societies
   Trusts
   Non Governmental Organisations (NGOs)
   State Corporations
   Informal institutions such as ROSCAs, ASCAs,
    Moneylenders
   Etc.
                                                   16
              Microfinance Players


 Microfinance players may be classified further
  into:
     Commercial banks – Equity Bank, K-REP Bank,
      Co-operative Bank and Family Bank. Other
      banks are also down-streaming to microfinance
     SACCOs – most have started the Front Office
      Service Activities (Retail banking)
     MFIs – various forms
     Informal financial service providers ranging from
      ASCAs and ROSCAs, money lenders and
      shopkeepers, among others
                                                     17
    Savings and Credit Co-operative Societies –
             SACCOs (Credit Unions)

   4,900 registered and 3900 active and SACCO societies
   SACCOs assets estimated at over KSh.167 bn. (US
    $2.2 bn.)
   Salary based, jua kali, transport, community based,
    rural and traders SACCOs
   Savings amounted to about KSh.160bn (US$ 2.46bn)
    or 35% of the national savings and loans outstanding
    amounting to KSh.110 bn. (1.7bn.)
   3.3 million ( approx. 11%) of the population Kenyans
    are members of a SACCO
   Members support about 10 million people directly
    through credit facilities and saving
                                                           18
      SACCO Legal and Regulatory
             Framework

 Some 180 SACCOs have started taking
  deposits by setting up FOSAs (Retail banking
  services)
 The largest SACCOs easily rank as medium-

  sized banks – so any widespread problems
  could easily be systemic in scale
 Lack of adequate regulatory and supervisory

  regime (Cooperative Societies Act)
 The SACCO Societies Regulatory Bill, 2008 to

  address regulatory concerns under the CSA 19
            Microfinance Industry

   Diverse institutional forms offering a variety of financial
    services and products to low-income households and
    SMEs
   The umbrella body (AMFI) has 34 member institutions
   Out of these, 25, 2, 4, 2 and 1 are retailers, wholesalers,
    banks, DFIs and insurance company, respectively
   AMFI members by December 2007, collectively had 841
    outlets, 2,073,363 and 493, 682 active savers and
    borrowers with KSh.16.589 million loans (US $
    260,000) disbursed and outstanding loan portfolio of
    KSh.16,007 million (US $ 250,000)
                                                           20
       Informal Microfinance

   A number of MSEs depend on informal microfinance
    providers
   The informal segment of the Microfinance landscape
    in Kenya is dominated by numerous Rotating and
    Accumulating Savings and Credit Associations
    (ROSCAs and ASCAs), money lenders, etc.
   ASCAs and ROSCAs as user-owned and managed
    models that offer additional features that appeal to
    the community
   There are numerous informal MFIs, however, the
    number and size of this market is yet to be
    ascertained
                                                     21
“ The Policy on Regulation and Supervision
             of MFIs in Kenya”

 A Tiered approach to regulation & supervision:
    Tier 1: ROSCAs and ASCAs: No regulation
   Tier 2: Credit-only/ Non Deposit-taking MFIs: Self-
     regulated by umbrella body
   Tier 3: Deposit-taking MFIs: Regulated and
     supervised by CBK)
 The principal objective of the Microfinance Act is to
  provide the legal, regulatory and supervisory framework
  for the entire microfinance industry both deposit-taking
  and non-deposit taking MFIs

                                                        22
       The Microfinance Act, 2006
The Microfinance Act covers:
  Deposit-Taking MFIs (to be regulated by CBK)

  Credit-Only MFIs - the minister to prescribe

  regulations to regulate their conduct

The deposit-taking MFIs are further categorised into:
  Nationwide MFIs (operating countrywide) – min. core

  capital of 60M (USD 860,000)
  Community MFIs (operating within a specific

  administrative region)- min. core capital of 20M (USD
  300,000)
                                                      23
 Key Highlights of The Microfinance Act
            and Regulations


 Application – both deposit-taking and non-
  deposit taking MFIs
 Licensing provisions – application, issuance
  and renewal of licence
 Licence fees – institution and branches only
  (No fee for outlets and agents)
 Revocation of licence
 Restriction of a licence

                                                 24
 Licensing of Deposit-Taking Institutions


 Two Categories of entry to regulated status
    Direct Entry: New companies registering for
     licensing as deposit taking MFIs
    Transforming Entity: Credit-only entities existing
     prior to the commencement of the Act transforming
     into regulated institutions under the Microfinance
     Act
 CBK expects about 15 institutions to transform in
  the next 12 months from the date of
  implementation of the Act

                                                      25
  Key Highlights of The Microfinance Act and
             Regulations …. Con’t

 Maintain minimum liquid assets of 20%
 Maintain, at all times, minimum capital
  requirements, including:
      Core capital of ≥10% of total risk adjusted assets plus
       risk adjusted off balance sheet items
      Core capital of ≥ 8% of total deposit liabilities
      Total capital of ≥ 12% of total risk adjusted assets plus
       risk adjusted off balance sheet items
 Place of business – head office, branch, outlet
  (marketing office, mobile units and ATMs) or
  agency
 No declaration of dividends without adequate
  provisioning of bad debts                                    26
             Prohibited Activities

 The main distinction with banks is the prohibited
  activities:
    Issuing of third party cheques
    Opening current accounts
    Foreign trade operations
    Trust operations
    Investing in enterprise capital
    Wholesale or retail trade
    Underwriting or placement of securities
    Purchasing or acquiring of land and buildings
     except for carrying out the deposit taking business
                                                      27
     Limits on Loans or Credit Facility

 Limit on loans
 Microfinance loan ≤ 2% of core capital
 Large exposure microfinance loans >2% but ≤
  5% of core capital
 Aggregate microfinance loans ≥ 70% of total
  loan portfolio, while loans >2% but ≤ 5% of core
  capital must be ≤ 30%
 Insider Lending – loans ≤ 2% of core capital
  and aggregate of ≤ 20% of core capital
                                                28
    Ownership and Management Structure

 25% ownership restriction to a single person
 25% restriction shall not apply to a wholly owned
    subsidiary of a bank or financial institution
   Any other company which the Minister may, on
    recommendation of CBK, specify
   No transfer of 10% or more shares of an MFI without CBK
    approval (significant shareholders)
   Every institution shall be managed by a Board of
    Directors of not less than five members
   Financial reporting to be compliant with IFRS
   Appointment of internal audit and external auditors
                                                        29
           Others Provisions

 Supervision by the Central Bank of Kenya
 Powers of CBK to intervene in management
 Periodic returns and information
 Information sharing arrangement
 Deposit protection and liquidation by Deposit
  Protection Fund Board (same for institutions
  licensed under the Banking Act)
 Transitional provisions - 12 months from 2nd
  May 2008
                                                 30
                Licensing of MFIs

 Commencement of licensing, regulation and supervision
    of deposit-taking MFIs started on 2nd May 2008
   CBK has prepared necessary documentation tools
    including licensing procedures/ steps, examination
    manuals/ procedures, licence, returns, performance
    standards, among others
   Capacity building: recruitment, training and exposure
    study visits, workshops/ conference, etc.
   CBK expects about 15 existing MFIs to transform in the
    next 12 months
   CBK has received three requests for name approval since
    29th May 2009
                                                        31
         Constraints and Challenges:
                 Regulator
   Capacity and human resource development
   Exposure to best microfinance practices
   Best international best practices in microfinance
    operations, policy, legal, regulatory and supervisory
    frameworks including microfinance surveillance and
    performance standards
   Development of appropriate documentation tools/
    procedures
   Risk management frameworks for microfinance
    practices
   Automation of surveillance framework
                                                      32
       Constraints and Challenges:
            Industry Players
   Management Information System (MIS)
   Governance and internal control systems
   Capacity and Human Resource Development
   Transparency and Accountability
   Reporting, Performance Standards and
    benchmarking
   Exposure to best microfinance practices
   Product Development and Delivery Channels
   Transformation Challenges and Constraints
   Legal, Regulatory and Supervisory framework
                                                  33
         Constraints and Challenges

Policy Makers
     Capacity and Human Resource Development
     Exposure to Best Microfinance Policy and
      Practices including legal, regulatory and
      supervisory regimes
Support Service Providers
     Technical Capacity and knowledge/ skills
     Not Industry Specific
     Need to Develop and Utilize ‘Rating’ Services
     Need to Develop Credit Reporting Framework

                                                      34
           Way Forward

   Create an enabling environment - Policy,
    legal regulatory and supervisory
    framework including research and
    development
   Develop appropriate performance
    standards and documentation tools
   Infrastructure development (Credit
    bureaus, Credit Rating)


                                               35
      Way Forward ( Cont..)

   Capacity building - CBK, Industry and
    Association (AMFI)
   Investment funds (equity and grants)
   Management Information Systems
    particularly to MFIs
   Partnerships with like-minded players in
    the development of a sound and stable
    microfinance industry as an integral part
    of the financial system

                                                36
            THANK YOU
CONTACT
      Director, Bank Supervision Department
      Central Bank of Kenya
      P. O. Box 60000- 00200, Nairobi, Kenya.
      E-Mail: fin@centralbank.go.ke or
      nyanjwacj@centralbank.go.ke
      Tel: +254 20 2860000
      Fax: +254 20 217940
      www.centralbank.go.ke

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