In 2006 the Parliament, through the Central Bank, enacted a Micro-finance Act that was effected on 2nd May 2008. The enactment deepened the financial market and enhanced access of financial services and products to all Kenyans. Primarily, the Act regulates the establishment of such institutions through licensing and supervision.
The Act enables taking deposits from the general public and hence promotes competition, efficiency, and access. The market has two types of licensed micro finance institutions – deposit taking and non deposit taking institutions. So, which ones take deposits and which ones do not, and what is their function?
I will begin with the deposit taking institutions and delve on their functions. The likes of Faulu Kenya DTM Ltd, Kenya Women Finance Trust DTM Ltd, Rafiki Deposit Taking Micro-finance, and many more. There are two main mechanisms of delivering financial services to the informal sector. We have relationship-based banking for small businesses and individual entrepreneurs as well as group-based models for people with similar interest – they approach a bank and secure a loan as a group.
Micro-finance targets the low-income earners in the society who don’t have much to offer as collateral security that is required by the mainstream banks. These institutions not only provide credit, but also have a saving platform, insurance covers and fund transfers.
By offering credit to the lower tier of the population pyramid, the economy develops, more jobs are created, and this helps in reducing the rate of poverty in the country. With a population of about 40 million people, riddled with a high rate of unemployment, the conventional banks find it nearly impossible to provide loans just to anyone.
In as much these micro-finance institutions sanction credit to the micro business, they offer it with a higher rate of interest unlike banks. The risks involved in giving credit without security qualifies them to do so as a sure way of recovering their money without huge losses.
Their loans are usually for a short-term basis with quick approvals and maturity that has proved good to the many clients who have unforeseen needs ranging from weddings, school fees, funeral expenses, and hospital bills.
Though the society has somehow found a solution to their financial needs, the money lenders are always focused on increasing their customer-base rather than alleviating the poverty among the borrowers. Lenders should make loans more cheaper and affordable if they would like to reduce the poverty level in the country.
Financiers should advice their borrowers to utilise their loans for productive purposes such as expansion of their micro enterprise or small business. By doing so, a borrower can generate more revenue to enable him to service back the credit he has taken. There have been instances of debtors defaulting their loans and have their properties auctioned off for recovery of their loans.