The Unfulfilled Promise of Microfinance in Kenya: The KDA Experience

This paper investigates whether microfinance services provided by Financial Service Associations (FSAs) in Kenya are fulfilling their potential to mitigate risk, foster profitable investment, and improve welfare.

Founded by the Kenya Rural Enterprise Program Development Agency, FSAs mobilize local resources, capitalize upon local information and wealth, and invest in borrowers who are members of their community. They face the challenges of poor infrastructure, inaccessible formal banking systems, lack of savings alternatives, and pockets of politically and economically marginalized populations. Study findings reveal that FSAs are:

• Bypassing the poorest members of the communities they serve, despite a stated pro-poor mission;
• Fostering regressive wealth distribution from lower-income, non-borrowing members to higher-income members.

The paper states that it would be difficult to accept that an initiative is pro-poor at face-value. The paper makes the following recommendations for FSAs to fulfil their potential:

• Use established credit histories as a basis for lending;
• Improve ex ante screening and ex post monitoring of loans;
• Explore compensation schemes for board members to offset personal costs;
• Train staff in loan screening, accounting and management;
• Shift priorities from loans to savings.