Source: Daily Nation.
Original news wire available here.
Kenya, August 8 – A large percentage of Kenya’s rural poor cannot access financial services. According to the Central Bank of Kenya, 38 percent of Kenyans have no access to financial services and are classified as “unbanked”, reporting no usage of either formal or informal products.
The majority of them live in rural areas and for them financial services are either costly or rigid. Only 19 percent of Kenyans are “banked” and thus have formal access to financial services through commercial banks, building societies and Postbank, according to the bank’s Banking Supervision Department report, 2007.
Savings and credit coopertives (Saccos) and microfinance institutions serve an additional eight percent while 35 percent depend primarily on informal financial services such as Rotating Savings and Credit Associations and Accumulating Savings and Credit Associations.
The study also indicates that access to financial services varies across the country and is highest in Nairobi, which has the greatest number of bank branches — 194 out of 443. Financial institutions seeking to work in rural areas face numerous constraints, such as poor infrastructure and low education levels.
Moreover, the main products of many microfinance institutions—short-term working capital loans with frequent expected repayments—are not well suited to seasonal or longer-term agricultural activities. However, most of the rural poor do not have access to these services yet they demand similar financial products and services as other socio-economic groups.
The cost of banking inhibits their access despite the fact that the experience of rural financial institutions shows that the poor can also save, borrow and repay loans at market rates. These were the findings of three collaborative country research studies coordinated by the Institute of Policy Analysis and Research (Ipar), and the Namibian Economic Policy Research Unit, Namibia and carried out in Kenya, Botswana and Namibia.
In the three countries, the study found that the location of the banks is heavily tilted towards the urban areas with good physical infrastructure, leaving large parts of the country uncovered. It also found that numerous products and services are offered by the commercial banks and for these, various multiple banking charges are levied, which make the cost of banking services escalate to levels beyond the reach of the rural population.
There is also reluctance to lend to small and medium enterprises and low-income households due to lack of credit history, no usable collateral, and a high cost of credit that is advanced by most financial institutions. This is notwithstanding the fact that some banks also offer in micro-finance services. But they are largely in urban areas.
Agriculture permanent secretary Dr Romano Kiome recently said the government’s goal is to develop the corporation into a rural credit bank. “Because we have realised that commercial banks are expensive and contrary to what some think, micro-credit institutions are equally expensive to farmers,” the PS said in an interview.
Despite the lack of access to financial services for the rural poor, the study findings indicate that higher incomes are related to a higher exposure to financial services. The study also found out that poor regions are associated with a higher probability of household heads who have never had access to financial services. As a result, the three studies recommend among other measures that there is need to develop innovative, tailor-made financial products and services for the poor.
The studies call for financial sector reforms with policies and incentives geared towards developing rural banking. They also advocate a policy environment that can facilitate proper functioning of rural financial institutions, so as to ensure sustainability of microfinance institutions.
“Governments should encourage the commercial banking sector to come up with schemes that appropriately target the rural poor,” says the report. “In this case, provision of tax incentives and suasion as well as a revision of the banking acts with a view to making them less prudential based for the poverty-targeted segment of their products may be necessary.”
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