Increased access to finance, and the development of new and innovative financial instruments
for Kenya’s micro, small and medium-sized enterprises, is key to achieving Vision
2030.Finance is an important driver of economic growth, and access to finance for
individuals and smaller businesses is a crucial indicator of economic development.

So how is Kenya measuring up? There have been significant improvements in access to finance
since 2006.First the good news. Between 2006 and 2009, the number of Kenyan adults with
access to formal or semi-formal financial services increased from 26.4 per cent to 40.5 per
cent. This is an enormous achievement—and it is largely due to the success of M-PESA, the
money transfer system introduced by Safaricom in 2007.

In just three years, M-PESA grew from a start-up mobile transfer service to a financial
network with more than eight million customers, 13,000 agents and more daily transactions
than Kenya’s entire banking system—though only some customers are currently using these
services to save money.

Growth in the microfinance sector, which doubled its market share over 2006-09, also
contributed to this achievement, though it still represents a mere 3.4 per cent of the
financial services market. Formal banking has also grown in Kenya recently, with access
rising from 18.9 per cent in 2006 to 22.6 per cent in 2009.

We have all seen the huge increase in the number of ATMs nationwide (there were less than
200 in 2002 and more than 1,400 today), but there have also been changes that we cannot see
so easily. The number of accounts has doubled since 2006, banks are linking up to M-PESA and
its competitor ZAP (a Zain product), and bank branches have grown by 200 since 2006.

The expansion of Equity Bank has been particularly striking, growing its deposit accounts
from 500,000 in 2006 to more than 3.5 million in 2009 through targeting financial services
specifically at low-income customers. Others are following suit.

As a result of these changes, only 32.7 per cent of Kenyan adults in 2009 did not have
access to any financial services—compared to 38.4 per cent in 2006. While these historical
changes have benefited individuals, banks and investors have also been steadily expanding
the debt and equity markets for small and micro enterprise (SME) financing.

The market for risk capital or venture capital funding is growing. Venture capitalists—which
invest in the early stages of SME development, from seed capital through start-up to
expansion—are a key driver of innovation in many economies.

Kenya-based funds, such as Business Partners International, GroFin, TBL Mirror Fund, Aureos
East Africa and the Acumen Fund, are small and mostly donor-funded, but they have
demonstrated that there are viable and scalable SME financing models that can deliver in
Kenya.

New product development in the banking sector, which is increasingly investing in new
lending instruments for SMEs (including the use of credit reference bureaux), supplements
these efforts. Examples include FINA Bank, which has a customer base mainly of SMEs and aims
to grow the smaller end of its SME portfolio by 100 per cent annually, building on data-rich
decision-making mechanisms, or scorecards.

Financial products designed to address SME-specific constraints, such as trade finance and
value-chain finance, are being developed, as well as index-based weather insurance; these
are also likely to broaden the market for SME and agriculture/rural financing. Finally,
Kenyan legislators and financial regulators have helped.

Credit history
Many new laws will help to boost access to finance, including the 2009 Finance Act (which
amended the Banking Act to allow the appointment of agents by banks— a policy that helped
improve access in South America, South Africa and India); the 2006 Microfinance Act (which
allows licensed micro-finance institutions to take deposits); and the Banking (Credit
Reference Bureau) Regulations 2008 (which, following amendments contained in the 2009
Finance Act, enable licensed credit bureaux to collect data on the credit history of all
firms, thereby facilitating lending and reducing the sole reliance on collateral).

The enactment of the SACCO Societies Act will facilitate better management of SACCOs, which
are in the front line in providing financial services in the rural areas.Yet, multiple
challenges remain as the overall access to finance remains limited.
Despite these many achievements, access to finance remains a major challenge in Kenya, for
individuals and for SMEs.Many Kenyans still rely on informal financial services or have no
access to finance at all.

About two in three rural Kenyans, and one in two urban Kenyans, do not have access to formal
finance—and within these categories, youth, women and the uneducated are typically worse
off.

Structural weaknesses
Only one in ten Kenyans report having used formal or quasi-formal credit products, and only
one in 15 have insurance coverage. Long-standing structural weaknesses in Kenya’s insurance,
pensions and capital markets partly explain these low numbers.

The story is not much better for micro, small and medium enterprises (MSMEs).
A 2007 study on SME banking revealed that almost 90 per cent of Kenya’s MSMEs were not
registered, and that only one in four MSMEs in this non-registered group had bank accounts
and one in 10 had ever received credit from a formal source.

In light of these facts, it is not surprising that a 2007 World Bank Investment Climate
Survey found that 41 per cent of SMEs, and 76 per cent of micro-enterprises, consider access
to finance to be a major constraint.The main sources of credit for MSMEs remain informal,
such as loans from friends or family. The Government could do more to make the
collateralisation process easier.

One of the main reasons firms and individuals can’t get credit is that banks continue to
demand collateral to process loans, and collateralisation processes remain costly and
complex.A September 2009 study found that collateralising immovable property in Kenya could
cost up to 6.7 per cent of the loan amount (including legal fee costs, stamp duty and bank
commissions) and take 72 days.

When you add the lending rate (about 15 per cent these days), the loan expenses become very
large. There is also lack of development of movable collateral as an alternative. Leasing and
factoring are barely used.

The Government could make collateralisation easier—by consolidating the statutes that
currently regulate the creation and perfection of collateral, simplifying collateral
enforcement procedures, extending to movable collateral options, and broadening the scope of
instruments to include alternatives such as factoring and invoice discounting, hire
purchase, leasing, warehouse receipts, and

SME credit scoring.
One issues that are further complicating matters is the global financial crisis. While
Kenya’s financial system has remained relatively isolated from the direct effects of the
crisis, it is vulnerable to its feedback effects.

There are now signs that the crisis, as well as drought and political uncertainty, are
adversely affecting the real sector, and that in turn is reducing the performance and
stability of the financial system.The recent track record is a good one, and Kenyans have
already shown that they can make it happen.

Zutt is the World Bank Country Director for Kenya; Mascaró is the Senior Financial Economist
for Kenya

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