Taking Stock of Financial Inclusion in Kenya

According to UNICEF 42% of the Kenyan population lives below the poverty line meaning they live on less than $2 per day. Such population experience greater shocks to their lives more than the rest of the population; shocks such as illness, crop failures, livestock deaths, funeral expenses associated with the death of a loved one can be enough to further sink them and their surrounding community to acute poverty.

Although traditionally such challenges have been left to governments, civil society and other development partners, I reckon that the private sector can also participate in solving market failures and create value at a profit,hence playing a greater role in financial inclusion in Kenya.

Personal savings, Insurance, remittances to family members, table banking and other financing framework are great opportunities to private players to explore albeit carefully with clear understanding of the product designed  geared towards the specific market.

This article seeks to explore at a high level which financial services and products would be most valuable to the poor in Kenya and Africa in general.

The Grameen model of financing is a good place to start with since it’s associated with high repayment and low default. The model makes small loans, usually to women, without requiring collateral. The downside though with this model is that this type of straight jacket credit product doesn’t increase the average incomes or consumption of households. Greater access to such loans may lead to a few entrepreneurs to increase working capital but not necessarily make profits.

Studies have shown that simple changes to credit products such as flexible repayment periods, grace periods, or the use of technology such as Mshwari, Musoni,KCB Mpesa among others may change their impact on poverty and financial institutions’ bottom line.

Savings accounts are effective safety net to people at the bottom of the pyramid. People don’t need to borrow money during a personal crisis if they have their own savings. Financial institutions have in the recent past encouraged saving through scrapping off of fees such as account opening, transaction, cash handling and the likes. Further innovations such as Mshwari,Mobile Banking have also encouraged the saving culture among the poor in Kenya.

Insurance is invaluable to shield against the many shocks faced by the poor although its acceptance is very low. In Kenya, farmers who receive rainfall index insurance through products such as Kilimo Salama cultivates more land and spend a greater percentage on farm inputs such as fertilizer and labor than those who received  cash, which brings us to the conclusion that uninsured risk  not lack of access to capital  is a primary constraint on investment by farmers.

However, despite the potential of insurance products to provide minimum risk cover for farmers and encourage higher-productivity investments, uptake at market prices is extremely low and commercial offerings have not found a profitable delivery model. Micro-insurance is not at scale anywhere except when heavily subsidized by government. In the next several years we expect technology to change the situation.

Digital financial services have proven to be an equalizer especially in Kenya. Digital payments such as Mpesa has significantly strengthened people’s financial resilience by enabling an informal risk-sharing network through loans or gifts from friends and relatives.

Digital platforms have transformed the delivery of financial services in Africa through; cost reduction, and increased reach of financial products.

It is critical that players in the finance sector understand the root cause of market failure or customer pressure points which would lead to effective product designs. In depth research on market failures by sector players would enable greater and more inclusive service to the poor.