Background Information on Kenya
The population of Kenya was 38.6million in 2009 of which 19.2million were males while 19.6 were females. Kenya's population growth is fairly high for her size and level of socio-economic development. With the current growth rate of 3 percent, Kenya is adding about one million people to its population annually putting pressure to its socio-economic development [1] .
The proportion of the economically active population was 58 percent in 2009 with males accounting for 53 percent in the active population. Out of these economically active population, 88 percent were employed for pay, on own or family businesses and farms. While the proportion of economically inactive (economically dependent) population increased to 42 percent in 2009 from 34 percent in 1999 which is an indication of increased poverty levels in Kenya [2] . The economically active population consist of the members of the population who are working plus those not working but available to work. This consists of the employed and the unemployed. The economically inactive population covers those not available to work and includes; incapacitated, the old, retired and fulltime students.
The rural population account for 67 percent and of the economically active population, about 3 in 10 are in the urban areas and about 33 percent in urban areas are economically inactive. Close to half of the Kenyan population live below the poverty line as it is estimated at 18.1million people (47% of the population). Other macro-economic indicators include the Gross National Income (GNI) per capita of USD.1, 560 and Inflation rate of 16.9% as summarised in the table 1 below;
Table 1: Macro-Economic Indicators
Indicator
Value
Population*
38.6 million
Population below the poverty line
18.1 million
GNI per Capita
1,560 US$
Inflation Rate
16.90%
Total Assets, Banks (US$)
17.8 billion
Total Assets, MFIs (US$)
1.5 billion
Source: CIA World Factbook, * Figure from Kenya Census 2009
A comparison of two periods 2006 and 2009 showed an improvement in financial access due to the expansion of the services by both the commercial banks and MFIs. The usage of M-PESA services further fuelled the growth enormously [3] .
Figure 1: Comparative Illustration of Financial Access in Kenya
Source: FSD Kenya Fin-Access (2009)
From figure 1 above, the proportion of adult Kenyans that are excluded from accessing financial services and products was 32.7 percent in 2009. While on the other hand, 67.3 percent of adult Kenyan population accessed financial services and products using formal, semi-formal and informal financial service providers.
The Banking Sector in Kenya
The Kenya's banking sector comprises the Central Bank of Kenya, as the regulatory authority, Commercial banks, Forex bureaus, Non-bank financial institutions and Deposit taking microfinance institutions as the regulated entities. Commercial banks and Mortgage finance Companies are regulated under the Banking Act and Prudential Guidelines. While Deposit taking microfinance institutions are regulated under the Microfinance Act.
Outreach of financial services is fairly low in Kenya. According to the Fin-Access Survey 2009, there was constrained access to financial services and products to majority of Kenyans. The results revealed that the proportion of adult Kenyans that are excluded from accessing financial services and products was 32.7 percent. On the other hand, the survey results indicated that about 67.3 percent of adult Kenyan population accessed financial services and products using formal, semi-formal and informal financial service providers. In addition, 22.6 percent of the adult population had access to formal financial services through Kenya Post Office Savings Bank (KPOSB) and Commercial banks. Further, 17.9 percent of adult Kenyans were served by other formal institutions, namely, MFIs and Sacco Societies. And finally, the proportion of adult Kenyans that depended primarily on informal financial service providers such as ASCAs and ROSCAs, shopkeepers and money lenders were 26.8 percent.
1.3 The Microfinance Sector in Kenya
The microfinance industry of Kenya is relatively new when compared to pioneering countries such as Bangladesh, Indonesia and Bolivia. Even though the informal financial institutions and some credit schemes have existed in Kenya for decades since the early 1980s, the first true MFI appeared in 2009 after enacting the microfinance Act in 2006. The microfinance industry in Kenya is comprised of different types of institutions registered and regulated and/or supervised under different legislations, including commercial banks; Agricultural Finance Corporation (AFC) and the Kenya Post Office Savings Bank (KPOSB); deposit-taking microfinance institutions and numerous non deposit-taking microfinance institutions. The non-deposit (credit only) taking institutions include companies; trusts and NGOs; saving and credit co-operatives societies (SACCOs); accumulating and rotating savings and credit associations (ASCAs and ROSCAs) and money lenders, among others. As at June 2010, non-deposit-taking MFIs were not regulated by Central Bank under Microfinance Act, as they are either SACCOs which are supervised by the SACCO Societies Regulatory Authority (SASRA), or the informal microfinance which are not regulated. However, the Central Bank is currently consulting with various industry players to establish the best practices for incorporating credit only MFIs into a regulatory framework (Central Bank of Kenya, 2009).
The microfinance activities widely vary depending on the scope, target, client base and regulatory framework. The non-deposit taking activities are undertaken by various financial institutions, individual private companies (money-lenders) and those registered as Non-Governmental Organisations. In this regard, the exact number of players undertaking credit only microfinance business in Kenya is largely unknown. The microfinance industry has been experiencing numerous changes since the microfinance Act became effective in May 2008. The Act provides a Deposit Taking regulatory framework which enables MFIs to mobilize savings from the general public. The sector is divided in to three; unregulated MFIs, deposit taking licensed MFIs and institutions operating with a full banking license. Currently, there are five commercial banks undertaking microfinance activities, namely: Equity Bank, Family Bank, K-REP Bank, Jamii Bora Bank and Co-operative Bank. The deposit taking microfinance institutions are currently two, namely; Faulu Kenya Limited and Kenya Women Finance Trust Limited. However, the number of commercial banks down streaming their business to include microfinance activities, to low-income households and small and micro-enterprises is growing rapidly.
The Association of Microfinance Institutions of Kenya (AMFI), a microfinance umbrella organisation, had 41 registered member institutions as at 31st December 2009. Out of these, four were commercial banks, one insurance company and the Kenya Post Office Savings. These institutions served over four million clients with an outstanding loan portfolio of USD 30 million (Kshs. 2.262 billion) while the commercial and non-bank financial institutions served over eight million deposit clients with deposit balances of USD 13.3 billion (Kshs 1.0 Trillion) as at December 2009 [4] (Central Bank of Kenya, 2009). The Sacco societies represent significant part of the Kenyan financial sector. According to the Central Bank of Kenya report (2009), there were over 5,000 Sacco societies, out of which 3,500 were active while the rest were dormant. The Sacco societies accounted for 3.3 million deposit accounts worth USD 2.2 billion (Kshs. 165.88billion), and loans outstanding of USD 1.5 billion (Kshs. 112.5 billion) as at December 2008 [5] .
2.0 KENYA WOMEN FINANCE TRUST -DEPOSIT TAKING MICROFINANCE
2.1 Institution Overview
KWFT-DTM is a 100 percent wholly owned subsidiary of the Kenya women Holdings Limited. It traces its roots to 1981 when KWFT was established as non-profit company limited by guarantee. The transformation into a regulated Deposit Taking MFI necessitated restructuring the KWFT to have a different legal status. This led to the creation of KWFT-DTM and Kenya Women Holding Limited (KWH Ltd.) The KWFT-DTM provides all financial services and products whereas; KWH Limited provides non-financial services and products in conjunction with KWFT-DTM. It provides access to financial services to women entrepreneurs to enable improve their economic status and livelihoods. Since inception, it has grown to be one of the most successful MFI in the country, with the largest network providing deep penetration into rural and urban areas of Kenya. KWFT-DTM enjoys a unique status in financial services as the only financial institution to focus solely on women clients.
2.2 The Management and Organizational structure
KWFT-DTM organization is characterised by extremely fast growth and the structures and systems are put in place to cope up with this kind of growth. Currently, the organization structure is organised into three zones, each of which in turn oversees four to five regions. As at June 2010, they were a total of 205 offices countrywide and out of these, four were fully pledged banking halls (branches) where they offer all financial services and products under one roof. Below is figure 2 showing KWFT-DTM network countrywide.
Figure 2: KWFT Branch/Units Network Countrywide as at June 2010
Source: Constructed from the List of KWFT branch network
There are nine functional departments namely; Administration, Human resources, Finance, Operations, Audit, Risk & Compliance, Information & Communication Technology (ICT), Marketing and Legal. All these functions are headed by qualified senior staff with majority of them from commercial banking stream. Some of the functions were created whilst the qualified and experienced senior staff members were hired to head some functions as part of the requirements of Central Bank of Kenya. There are only 25 office centres including the head office out of the total 205 KWFT-DTM outlets with real-time interface on the core banking system (T-24). The rest of the offices transmit accounting data manually which is prone to human errors (operational risk).
As at June 2010, staff totalled 1,637 comprising 966 credit officers and 671 administrative personnel. The slightly higher number of administrative staff can be explained by the high extensive network of offices countrywide and the high labour intensive accounting set-up. Below is figure 3 depicts the expansion of total staff growth in the institution.
Figure 3: Growth of total staff over the last five years
The education levels of staff ranges from degree holders to High school level coupled with professional qualifications. The table below shows estimated proportion of different levels of staff qualifications in the institution as at June 2010.
Table 2: Composition of staff by level of education
Education Level
Percentage
Masters
2%
Degrees
20%
Diploma/CPA
75%
Certificate
3%
Total
100%
Source: Estimates from the management of KWFT-DTM
As indicated above, the majority of the KWFT-DTM work force has diplomas and professional courses (CPA) and less proportion with basic and higher education.
2.3 The products and services offered
KWFT-DTM has a range of products and services that focus on meeting the needs of women entrepreneurs. Its success is based on the recognition that women are the key niche market with poor access to financial services than the rest of the Kenyans. Over 66 percent of Kenyan women are excluded from the formal financial services [6] . Therefore, KWFT-DTM target niche remains low income business women. This market niche is capable of assuring KWFT-DTM future growth and this continues to be the institution's strength.
The products and services offered are mainly loans and less of voluntary savings, insurance and money transfer as they were recently granted the licence to mobilize savings. Loans are divided into two categories; group loans and individual loans. In the group loans, it's further categorised into big groups (15-35 members) and mini groups (7-10 members). Within the groups, sub-groups (5 members) are formed to keep an eye on each other business and act as a first group guarantee. General lending terms (interest, maturity, collateral) are diversified according to the amounts and type of loan.
Figure 3: Trend of saving and Loan products
Consumer loan products are structured with partnering companies and are mainly contractual arrangements between the partners and KWFT-DTM. These products include school fees, water tanks, solar panels, cooking gas and health insurance. Generally, the group lending methodology is mostly applied compared to the individual methodology. As at June 2010, the outstanding group and individual loan portfolios were 83% and 17% respectively of the total gross outstanding portfolio of Kshs.11.1 billion (USD 140 million). Self formed groups have eight weekly training sessions before the first disbursement.
KWFT-DTM offers savings services to women in general and the savings accounts can be term deposits or ordinary deposits. The channels used to access savings accounts can be either directly at the KWFT-DTM branch or through financial institutions acting as agents of KWFT-DTM. In areas with KWFT-DTM branch offices, clients operate their accounts in their branches. All account opening procedures are followed in line with Central Bank of Kenya minimum requirements (Know your customer procedures). Whilst areas without KWFT-DTM branch offices, clients operate their accounts through agency arrangements. This allows KWFT-DTM clients to open, operate their savings accounts through third party financial institutions. These accounts hold funds that are used to process transactions on behalf of KWFT-DTM account holders. An optimal agreed limit of balances is maintained in the accounts held by the agencies to ensure that KWFT-DTM is able to honour clients' withdrawals. Any funds in excess of the optimal set limit are swept into the KWFT-DTM main accounts for utilisation (lending and investing). The processing of deposits/withdrawals is handled in back office of KWFT-DTM so as to reflect the individual client account balances in KWFT-DTM. As at June 2010, KWFT-DTM had mobilised Kshs. 26 million (USD 325,000) after being licensed in April 2010 to mobilize savings out of the total savings (compulsory and voluntary) of Kshs.4.8 billion (USD 61 million).
The Insurance products and services are accessed by KWFT-DTM clients through KWFT-DTM acting on behalf of insurance providers. The insurance premium is paid by KWFT-DTM on behalf of the insured client and subsequently the client makes instalment repayments to KWFT-DTM as loan repayment. The insurance products provided include; health insurance, personal accident cover and life insurance. And finally, mobile banking service (M-Pesa) is used by clients to make repayments in places where they are no branches. Domestic money transfer was yet to be operational. However, KWFT-DTM was in the process of setting up structures to enable their clients transfer and receive funds countrywide.
2.4 The financial performance of the institution
The overall financial performance of KWFT-DTM has improved over the years. As at December 2009, it was the second largest MFI in Kenya after Equity bank in terms of total assets, loan size, personnel and number of clients. Its portfolio at risk was at 1.3% and it was one of the best financial institutions with low loan portfolio at risk in the Kenyan industry. This was possible to achieve through the lending methodology where group pressure mechanisms are enforced. Below is the graph showing linear trends of return on assets and portfolio at risk (PAR over 30 days).
Figure 4: Return on Assets and Portfolio at Risk Trends
The linear return on Assets (ROA) consistently increased from below 3% in March 2005 to 5% in June 2010. While the linear portfolio at risk over 30 days (PAR>30) was maintained below 3% throughout the period under study.
Figure 5: Net income and income before interest and taxes (EBIT)
There was a slow growth in income between 2005 and 2007. But in 2008 to 2010, there was fast growth as indicated from figure 5 above. This is explained by the increased loan portfolio and the number of clients during the same period.
INTERNSHIP CONTENT
3.1 The fieldwork Activities
I conducted a two and half Months internship and academic research thesis in KWFT-DTM from May 26, 2010 to August 6, 2010. The internship was part of the fulfilment of the award of European master in microfinance. The internship exposed me to obtaining field work and/or research experience from in the field of microfinance.
The theme of the research thesis was to establish the role of savings in microfinance institutions. It was to establish if savings fosters institution's financial performance and outreach. Therefore, Kenya woman Finance Trust-Deposit Taking Microfinance institution was chosen for this study. Though the institution transformed from credit only to deposit taking institution in the first quarter of year 2010, the savings regarded in this study were both voluntary and compulsory. The data collected for the research was both primary and secondary. The primary data was collected from selected women clients in rural and urban areas. While secondary data was obtained from the institution for the period 2005 - 2010 (quarterly reports).
The areas covered extensively in collecting primary data were central and western regions as categorized by the institution. The clients interviewed totalled one hundred and eighty-five (185) of which, one hundred and five (105) clients were from rural areas of western region and eighty (80) from the central region including the city of Nairobi and its environs (Kibera slums).
During the internship period, I stayed for two weeks in the institution's Head Office which is situated in Nairobi suburbs two kilometres from the city centre. During this period I familiarized myself with the institution. At the head office, all the nine functional departments of the institution namely; Administration, Human resources, Finance, Operations, Audit, Risk & Compliance, Information & Communication Technology (ICT), Marketing and Legal were visited and learned their functions and operations. The policies and operational manuals were reviewed and noted to address most aspects of functional units adequately. To mention a few, human resource policy, covered the following areas; training needs assessment, benefits, working ethics, hiring and firing powers, transfers and job evaluations. Contained in the finance policy, was the following; finance management and accounting operations, treasury management, procurement and payroll. The operations policy (credit policy) as called by the institution because of the previous status of credit only, covered the following areas; processes of assessing the clients' businesses on group and individual methodologies, loan classifications and provisioning and approval limits. The loan classification and provisioning followed the minimum Central Bank of Kenya requirements of 1% for normal, 5% for watch, 25% for substandard, 75% for doubtful and 100% for loans over 90 days in arrears (Loss).
After the short stint in head office, I visited branches/Units within the central region of Nairobi. It included Kibera slums - the largest slum in Africa. In this central region, I spent two weeks visiting the KWFT clients and attending group meetings with the business development officers (BDOs) who are responsible for marketing all products of the institution including savings. This region was a striking encounter to meet clients in near to abject poverty and others comparably well-off. I realised the enormous economic activity taking place in this kind of environment but in small scale activities. Admittedly, although I had previously spent over twenty years in Nairobi city, it was a big surprise to encounter the scale of business activities undertaken by people living in the slums.
After having a feel of the urban area, I headed to the western region for three weeks where I spent most of the time in Eldoret town and its environs. The environs of Eldoret are typical of Kenyan rural settings. The first week in Eldoret I concentrated with the branch operations such as opening new accounts for clients and handling customer inquiries. After that, I joined the BDOs to the field where we could sometimes meet with one group per day because of the distance and logistics (motor bikes were used to visit clients both individual and groups). During all these visits to the clients, I would personally administer questionnaires and where necessary assisted to clarify some questions which were not understood clearly by the clients.
I spent the last three weeks of my internship in head office collecting secondary data in the finance department. Because of the nature of information I required, it took time to obtain all the information as some of the data had to be pieced together from different files. Since the institution had changed to T-24 a core banking system, the data had not been input into the system hence, some data were derived from excel spread sheets. This period was used to verify the data by cross-checking with other financial reports for accuracy and reliability. Some of the data obtained for the five year period of study were, new clients, drop-outs, clients saving only, clients with loans and savings, outstanding loan balances, savings balances, portfolio at risk, staff, total assets, net income and return on assets.
To sum it all, field activities were the most interesting experiences I ever had. I learned how branches were operated and managed, the process of loan appraisal, disbursements and instalments collections. Further, it was an experience to see how member groups were formed; from self selection and training for 8 weeks the group guarantee and peer pressure mechanisms before lending to them, how members relate to each other and KWFT BDOs, etc. It was at this juncture that I could realise how microfinance activities were undertaken and how the institution has managed to be financially sustainable and efficient.
3.2 Key Research results and findings
The findings from the analysis of the secondary data using OLS regression and correlation analysis confirmed that, outreach and financial performance can be achieved. KWFT demonstrated very good outreach especially in the rural areas with improved financial performance. Although KWFT served majority clients with previous access to financial services, it also managed to reach out close to a third of its clients who were previously excluded. Maintaining its mission of providing social and financial intermediation, the institution could reach new heights of financial and social success, measured in increased outreach, profitability and the establishment of a viable institution that could serve the poor women long term. The institution's growth has continued to be focused on rural areas as rural clients constituted about 60% of the total clients. Average savings per client was consistently at US$155 although the clients increased significantly. This illustrates the institution's continued outreach towards new poor clients.
After analyzing the financial and outreach data provided by the institution, the results proved that there was no role of savings balances in achieving better financial performance but there was strong association between savings balances and financial performance of an institution. Savings balances increased as well as financial performances and the opposite was true when savings reduced. However, savings played a role in outreach through the number of clients served by the institution; it showed a strong association with institution's clients. Further, the results indicated that there exists strong association between outreach (measured by savings clients) and financial performance (measured by return on assets). Therefore, it indicated that, MFIs with improved financial performances can also improve their outreach.
The findings on KWFT clients' preference of financial services and products revealed that, credit was still and important services for most of the clients followed by savings. This can be explained by the fact that the institution was previously a credit only institution and had just transformed to deposit taking. Therefore, savings products had not been extensively offered to clients. In addition, MFI clients prefer savings products that are secure and with a return than liquid and accessible savings and products. Although these results only represent KWFT clients, it can be inferred that, Microfinance clients in Kenya prefer savings in institutions that guarantees security of their savings and a fairly competitive return on their money.
3.3 Issues of concern by the clients
Some of the clients I met during the field visits raised the following enumerated issues which head office was to address. The clients were willing to divulge the issues to me more than the BDOs as I introduced myself to be from head office and they wished their grievances to be delivered to top management of the institution.
Offsetting the loans with compulsory savings of defaulting clients was not allowed by the institution until when the loan was fully cleared by members through contribution. This condition discouraged the group members and overburdened them with extra payments which were not fore-seen by them. This problem sometimes led to the group disintegration and drop-outs as observed in the field.
Some clients complained of high lending interest rates compared to the commercial banks and KWFT competitors. This was true for clients who were accessible to other financial institution, although they could not access the services because of lack of security.
Saving refunds for drop-out clients were taking too long to be executed while the interest earned on the compulsory savings was very low (0.5%) although the savings interest rate was only disclosed at end of the year when interest payments on compulsory savings were made to respective clients.
Recoveries of loan arrears: - Some clients complained of BDOs harassment during collection periods and this sometimes also led to client drop out.
Finally, some clients complained that penalties collected for lateness during the group meetings were pocketed by BDOs and not reflected anywhere in the records. However, the BDOs explained that the money goes to the institution directly as income through penalties.
3.4 Personal observations and comments
After raising the issues by clients with management, also the following personal observations were put forward for management attention and some were of help to the institution.
Continuous market research on various products required by clients was found necessary in a competitive environment (Price and appropriate products) e.g. Farm loans tailored with seasonal incomes from the farm sales.
The group who wanted to graduate to higher loans were denied by BDOs to borrow as individuals for fear of group disintegration. However, this action sometimes led to drop-out of members.
The average period of loan disbursement was one month. However, there was a delay sometimes in some regions for loans requiring the General Manager's approval that was not stationed in one region leading to prolonged delays in loan disbursements. The turnaround time can be reduced especially the individual loans to match with the market practice of less than two weeks.
The BDOs mostly concentrated on group loan products and less on individual loans as group loans were perceived to be less risk. Various targets could be put in place like portfolio size, default rate and deposits mobilized so as to balance the various corporate strategies.
With the authorization by CBK to mobilize deposits, very little had been done to achieve this goal. For example, Eldoret branch still played the role of loan disbursement as majority of the clients were borrowers. BDOs needed to be sensitized to mobilize savings and to encourage individuals to deposit with more competitive terms. This needed the corporate strategy to be cascaded downwards to staff.
The institution was advised to Lobby/request Central Bank of Kenya for a window to issue third party cheques in conjunction with a bank and to deal in spot foreign transactions. These would enhance the operations of the institution in regard to the increased high net worth clientele and minimize transaction cost leading to better returns.
In order to gain acceptance by clients in all the regions targeted, KWFT-DTM was advised to be more embedded with the communities. The institution needed to put the face of the community for easy acceptance. The institution to create customer care desks in banking halls with staff from those regions in order to assist clients in the language they understand and help reduce queues by re-directing clients to appropriate counters.
KWFT-DTM was noted to have high reputational risk (impounding of clients assets). The institution was advised to minimize the risk by finding out the problems encountered by clients before impounding their assets. Some defaulters might have had genuine problems which may require forbearance.
