Paper

The Dynamics of Competition in Karatina's Financial Markets: Assessing the Impact of Microfinance in Kenya

The impact of MFIs within the financial market considering competition and demonstration effects
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This paper states that one of the objectives of donor support to the entry of microfinance institutions (MFIs) into financial markets has been to demonstrate that financial services can be provided profitably to poor clients. However, studies examining this area are virtually non-existent.

The paper seeks to address this gap, by focusing on microfinance in the town of Karatina in Central Kenya, where the Kenyan microfinance industry is concentrated.

The study finds that:

  • Demonstration effects from group mechanisms appear strong, especially from managed Accumulating Savings and Credit Associations (ASCAs);
  • Some better-off clients recognise the benefits of operating financial services for themselves;
  • Competition for deposit accounts is strong;
  • Players, such as The Equity Building Society and the Savings and Credit Cooperatives (SACCOs), are learning how to serve this market and how to link loan products to their savings accounts;
  • After conversion into formal financial entities, the MFIs may find that they are competing in a well-served market with high service standards.

The paper concludes that local MFIs need to:

  • Come up with flexible products that respond to customers' needs;
  • Justify their interest rates;
  • Avoid overly aggressive expansion strategies that might provoke multiple membership and over-indebtedness;
  • Understand the dynamics of their local markets;
  • Undertake collective action to defend their strategic position and develop their competitive advantage in an increasingly competitive market.

About this Publication

By Johnson, S.
Published