Does access to low cost finance translate to poverty alleviation?

Last week Friday, Rachel Ruto, wife of the Deputy President of Kenya, William Ruto met with women groups from Narok county and urged them to form saving groups and take bank loans in order to improve their living standards. Limited access to information on credit opportunities was quoted as being the main cause of missing out on funds by about ninety percent of women in rural areas. She further noted that only women groups in urban areas seek credit from revolving fund kitties such as the Women Enterprise and Youth Funds because ‘they access information and know how to make business proposals.’ However, my study on micro-finance institutions (MFIs) and their collaboration with the Kenyan government in the disbursement of Women and Youth Funds seems to indicate that the problem is more deeply rooted or at least not as simple as suggested.

I recently interviewed Shiro, a former Jamii Bora Bank[1] Loans Officer and she affirmed that the government does offer low interest funds through MFIs however the exercise is intermittent and most importantly the supply of these funds does not match their demand. Well, this is quite understandable given the ten percentage point difference between the interest rates on loans from MFIs and the government’s revolving funds. So how do urban women access information on these funds? Mainly through government pronouncements in leading newspaper media and through MFI loan officers. Should urban women be more advantaged than the rural ones? Yes, to the extent that they can read and can spare Ksh.50 (about $0.6) to purchase a newspaper – which really does not account for the difference in the revolving fund loan applications. The women in the urban areas to which these funds are geared are also poor and have very little formal education, if any. So how will poor women be trained not only to write winning business proposals but more importantly, to translate the loans borrowed into improved businesses and profits in order to ultimately lift their socioeconomic status?

Most MFIs state their mission as existing for the purpose of giving poor people access to credit. However, it’s widely accepted and known that their ultimate goal is poverty alleviation. The institutions make the assumption that building strong financial institutions for poor clients will eventually lift them out of poverty. However, there is a palpable gap between accessing the finance needed to start up a business and creating a successful one.  According to the Stanford Social Innovation Review[2] , the latter requires MFIs to provide financial education, management training, value chain support and social services in addition to the services offered by the traditional financial institutions. This would shift MFI’s focus from tracking outcomes that are not in tandem with their ultimate goal such as loan repayment rates and loan sizes (rendering them no different from the commercial banks) to health, nutrition, housing and education improvements.

Economic pressures and the need to be financially sustainable have seen MFIs such as Jamii Bora develop into institutional-centered outfits as opposed to being client-centered. Prior to March 2010 that is, when Jamii Bora became a full-fledged bank, it offered its borrowers and their dependants health insurance covers at the subsidized deposit amount of Ksh.1,200 per year or Ksh. 30 ($0.35) per week. This service has since been scraped off. Undoubtedly, there are numerous advantages of the growth from a trust/MFI to bank status, such as access to higher loan amounts by clients; however, to the majority of the population, even the minimum is not attainable. Jamii Bora Bank had to lower its minimum loan level amount from Ksh. 100,000 ($1,176) to half of that because its clients could not service the higher amount.

So is the problem solved by access to information on low cost credit and knowing how to write powerful business proposals?

I don’t think so.

[1] Jamii Bora Bank was initiated as a charitable trust in the year 1999 by 50 street families who were seeking to solve their financial problems. Ingrid Munro and a number of Swedish investors were its founders.



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