evaluation of microfinance institutions and projects...2012/01/11 · 1 evaluation of microfinance...

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Evaluation of Microfinance Institutions and Projects

Microfinance as a Successful Approach for Poverty Reduction?

Bileam Bader M.A. ([email protected])

Matthias Nöckel ([email protected])

Angela Preißer ([email protected])

Miriam Steinlein B.A. ([email protected])

University of Trier, Germany

Anthony Kagiri ([email protected])

Patricia Mutai ([email protected])

Julia Muthiga ([email protected])

Kenyatta University Nairobi, Kenya

Julian Frede, Dipl.Volksw. ([email protected])

University of Trier, Germany, research assistant

Date: November 1, 2012

Abstract

This paper is concerned with the question whether microfinance is an effective approach to sustainable

poverty reduction and the challenges encountered by microfinance institutions (MFIs). The findings

presented in the following research result from over 70 qualitative interviews with loan takers from Kenya

as well as expert interviews with representatives of various microfinance institutions. The study will be

structured as follows: After a short introduction to the concept of microfinance with a presentation of both

positive and negative effects widely discussed in academic literature, the survey design of the research

will be described in detail. The main focus will then lie on the case studies of two MFIs – Musoni Kenya

and DISC INITIATIVE – as well as the evaluation of other microloan programmes, such as Vision Afrika

Sacco Ltd., using both client and expert experiences. Each case study will consist of the evaluation of

client interviews, a SWOT Analysis for each MFI and proposals for the institutional evaluation. To

conclude the paper, an overall assessment of microfinancial services will be given in detail. This will be

done by looking at possible impacts of microfinance on the loan takers financial and personal situation,

and the challenges MFIs are facing from their clients’ point of view.

Keywords: Microfinance, Evaluation, Microfinance Institutions.

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Contents

1. Introduction ..................................................................................................................................... 3

2. Survey Design ................................................................................................................................. 4

3. First Case Study – Musoni .............................................................................................................. 6

3.1 About Musoni ............................................................................................................................ 6

3.2 Steps to the First Loan ............................................................................................................... 7

3.3 SWOT Analysis of Musoni ....................................................................................................... 8

3.4 Evaluation of Musoni Kitengela ................................................................................................ 9

3.5 Evaluation Musoni Naivasha ................................................................................................... 11

3.6 Conclusion of the Individual Client Interviews ....................................................................... 14

3.7 Institutional Conclusion Musoni ............................................................................................. 15

4. Second Case Study – DISC Initiative ........................................................................................... 15

4.1 About DISC Initiative .............................................................................................................. 15

4.2 Steps to the First Loan ............................................................................................................. 16

4.3 SWOT Analysis of the DISC Initiative ................................................................................... 17

4.4 Evaluation of Interviews .......................................................................................................... 18

4.5 Conclusion of the Individual Client Interviews ....................................................................... 20

4.6 Overall Conclusion of DISC and Proposals ............................................................................ 21

5. Evaluation of Further Microfinance Institutions........................................................................... 21

5.1 SISDO ...................................................................................................................................... 21

5.2 Vision Afrika SACCO ............................................................................................................. 22

6. Microfinance – a Blessing or a Curse? Two experiences ............................................................. 24

7. Overall Evaluation of Microfinance ............................................................................................. 25

7.1 Impacts of Microfinancial Services on the Clients’ Financial and Personal Situation ........... 25

7.2 Institutional Challenges ........................................................................................................... 26

7.3 Clients’ Recommendations ...................................................................................................... 27

8. Conclusion .................................................................................................................................... 29

9. References ..................................................................................................................................... 31

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1. Introduction

In most developing countries the poor have to fight a daily battle for survival and are unable to free

themselves from the poverty trap they were born into. This is also due to the fact that they are denied access to

financial services such as loans to start up their own businesses or to receive a proper education. As the labour

force of many developing countries comprises to more than 50% of the self-employed (cf. Microcredit

Summit Campaign 2009) it is important to give the whole of a country's population the opportunity of starting

up their own businesses. The idea of microcredits was introduced as a tool to give the poorest the opportunity

to take part in the banking system even without any collateral. In theory, this should enable them to become

creative and free themselves independently from their poverty by investing in an own business. Therefore,

microlending is, in accordance with the idea of Muhammad Yunus, meant to give the poor and the very poor a

chance to improve their own situation. Professor Muhammad Yunus was one of the first to launch a

microfinance project. His Grameen Bank, commonly known as the “flagship of the international microfinance

movement” (e.g. Morduch 1998: 2), was established in 1976 with the purpose of extending “banking facilities

to poor men and women” by enabling them to obtain microloans of up to 1,000 Euros, and of eliminating “the

exploitation of the poor by money lenders” (cf. Grameen Bank – Bank for the Poor: 2012). In recognition for

his contribution to the fight against poverty he received the Nobel Peace Prize in 2006.

Microfinance is a highly discussed topic within the research field of development politics and poverty

reduction in third world countries. Advocates of microcredits argue that this concept is the only sustainable

way to escape extreme poverty (cf. Chemin 2008: 463). Furthermore, as already mentioned, access to

financial services such as loans is essential for economic development and to fight the poverty trap. Matthieu

Chemin goes one step further stating that, “finding ways to give loans to poor people without collateral could

lift a country out of poverty” (ibd.: 464). Furthermore, microcredits resolve the exclusion of the poor from the

banking and financial system and therefore promote and foster social integration. Additionally, they

encourage entrepreneurship as well as self-reliance and, as the United Nations Department of Economic and

Social Affairs (DESA) observes, “create employment opportunities and engage women in economically

productive activities” (DESA 1998: 3). In fact, microcredits are widely considered to be an effective tool of

the empowerment of women (cf. Deshmukh-Ranadive; Murthy 2005: 33). Women are seen as “the most

appropriate targeted beneficiaries, since […] they are reputed to be more reliable than men when it comes to

repayments” (ibid.). Thus, by granting loans to women they are given economic and social independence, as

well as self-confidence. This, of course, only applies to countries in which equal rights for men and women

have not yet been achieved. Another benefit of microfinance is to be found in the field of education. Since

microfinance institutions (MFIs) such as the Grameen Bank also offer educational loans at low interest rates,

it is hoped that this will allow more people to attend school or receive proper vocational training (cf.

Becchetti; Conzo 2010: 19). Likewise, access to loans could also increase “child enrolment in school if the

opportunity cost of school decreases due to increased parental wealth,” as Chemin (2008: 464) suggests. The

last point to mention is that microloans give people the opportunity to help themselves break out of the vicious

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cycle of poverty without making them dependent on development funds. Thus, microcredits serve as an aid

for self-help (cf. Woolcock 1999: 18).

The benefits of microcredit cannot be denied. However, there is always another side to the coin and

the effectiveness and sustainability of microloans is to be seen controversial. Problems with which microloan

takers are struggling are not only a high pressure through weekly or monthly repayments, but also social

exclusion and compulsion through group-lending. Besides individual lending, the lending of money to a group

of people without collateral, but whose members act as a guarantee for each other, is also a commonly used

concept of microfinance institutes. Since the whole group guarantees for each other, the pressure of repaying

in time becomes a social one, additionally to a financial one. This problem of peer pressure in microcredit

schemes is a commonly examined research topic in academic literature and is discussed quite controversial

(e.g. Montgomery 1996). Another problem that occurred with the introduction of microloans to the formerly

unbanked society is the over-indebtedness and on-going impoverishment of the ones who had taken up a loan

and were unable to repay in time. Some loan takers even take up an extension loan to repay their first loan and

thus get caught in the micro-debt-trap. One scholar who argues that microloans are a catalyst for

impoverishment is the British professor for economics Paul Mosley (2001). This is a common problem which

might be due to the fact that most developing countries lack a credit registry which documents given loans.

However, such a registry is in a pilot phase in Kenya right now and is to be introduced in the years 2013/14.

After all, the evidence of micro loans increasing income is to be seen controversial. That is why the

following research is concerned with evaluating the effectiveness and sustainability of micro credits. It wants

to answer the question whether microfinance is an approach to successfully fight poverty. The evaluation

focuses on the socioeconomic situation of microloan takers. By means of qualitative interviews it points out in

which ways their financial and personal situation has been affected by taking up a microloan.

2. Survey Design

As the main focus of this research was on the clients’ situation of Microfinance Institutions, the research

group decided to use a qualitative research approach (Flick, 2003).

The main tools of evaluation were individual interviews, which were supported by group discussions with

the clients, as well as several interviews with experts from the affected MFIs.

Within the individual interviews, there was a short questionnaire in order to gather personal client data

such as age, gender, family situation and education. The following part of the interview was an interview

based on a guideline (Helferich, 2009). The main objectives of the interviews were to get personal information

about the clients’ points of view and their experiences with microloans/microfinance. The interview was

structured as it follows:

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1. Introduction:

The clients were asked about their personal data, such as age, gender etc.

2. Loan:

It was asked how the client got to know about the MFI, for which purpose the client took up a loan at

the mentioned MFI and of which amount the loan was. Furthermore, it was asked whether the client

believed that it was a good decision to have taken up the credit and in which way it affected his/her

business.

3. Repayment:

This question aimed at gaining knowledge about the client’s repayment conditions, such as the

repayment period, as well as if he/she had any problems with repaying the loan.

4. Evaluation of the MFI:

This paragraph is concerned with the question whether the MFI provided enough training for its

clients and if these training sessions were helpful and sufficient. In addition, it was asked if the MFI

itself is helpful and open to questions and demands of its clients. Finally, the clients were asked to

give recommendations to their MFI and if they could imagine anything that might improve the service

of the MFI.

5. Evaluation of personal situation:

The clients were asked to explain in which way their personal and financial situation had been

affected by their decision to have taken up a loan. The focus was thereby set on income and family

issues such as the ability to pay for school fees, housing situation etc.

6. Future expectations/dreams:

In the last category, the clients were asked about their future expectations, their dreams and hopes, as

well as the (in)ability of microfinancial services to help them with achieving those dreams.

For documentation all the information given by the client was written down in notes during the

interview. Usually there was one interviewer who asked the questions and another person recording. In some

cases it was necessary that a person translated while someone else kept notes. The notes that were taken were

always in English. Furthermore the handwritten notes were typed. These typewritten notes are available if you

send a request to the authors of this paper.

To evaluate the interviews, first, they were categorised by the MFI under examination. Within these

categories, they were further divided into subcategories which represented the specific lending-groups. In

addition to these subcategories stand the group discussions and the expert interviews for each MFI in order to

get a complete picture. So, the evaluation was divided into a single one for each MFI, which consisted of the

evaluations of the single cases as well as the analysis of the lending-groups. To sum up the evaluation of the

conducted interviews, an assessment of the various types of MFIs were made as well as one for urban and

rural areas. This renders it possible to give an overall evaluation of the findings.

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Musoni Established in: 2010

No. of clients: ~8,000

No. of employees: ~70

Branches: 5

Status: MFI, 4 Share-holders

Area: Mainly urban

To receive a broader picture of microfinance in Kenya, the MFIs were sampled into different types of

institutions, like small NGOs, established MFIs (Tier 2-3)1, formal banks and so called “Savings and Credit

Cooperatives” (SACCOs). Of each type, at least one institution was examined. Another level of sampling was

the area. As mentioned above, MFIs from both rural and urban areas were evaluated in order to gather

information about benefits and disadvantages in those different areas. Further more, within each MFI various

lending groups were analysed to also see the differences within one MFI. Those groups were investigated by

conducting at least one individual interview and a group discussion.

3. First Case Study – Musoni

3.1 About Musoni

Musoni is an MFI which was only established in 2010 and claims to

provide „Next Generation Microfinance“. 2 Special about Musoni is that they

operate completely cash free. Loans are received and paid back through

mobile phones, using the client’s Mpesa-account.3 This system brings benefits

for both sides: Clients can receive their loans fast and wherever they are and

Musoni does not have to invest in security infrastructure like safe rooms.

Musoni is hold by the Dutch investment fund Musoni BV Holland,

with Grameen Bank, KfW and Microvest acting as further shareholders. There are five branches in Kenya

(Zimmerman, Gikombe, Kitengela, Thika, Naivasha), which are located in Kenya’s capital Nairobi or less

than one hour away from Nairobi. Through these five branches Musoni serves a total of 8,000 customers,

mainly in urban and suburban areas. To provide financial service for the unbanked and the underbanked, is

the aim of the company. To do so profitably the company will have to grow above the number of 8,000

customers by expanding into rural areas and offering more products. At this time, only the possibility of group

lending is given to customers who want to do their first steps into the financial system. The new, more

profitable products will include individual lending, which grounds on a deeper knowledge of the client’s

financial history. This knowledge is not available at this stage.

One can divide the organisational structure of Musoni into three levels. On the highest level there is

the headquarter in Nairobi, which is in control of the overall financial situation of the company. One level

underneath are the managers of the five branches, who are concerned with the general wellbeing of their

department but do not have direct contact to the clients either. The direct contact takes place on the lowest

1 MFIs often are categorized into the so called Tier levels. These levels reach from Tier 1, which stands for small MFIs, NGOs etc.,

over Tier 2, for medium sized/growing MFIs, up to Tier 3, which stands for big and profitable MFIs (cf. Microfinenza 2011). 2 Usoni is Swahili for future, the M stands for mobile. 3 Mpesa is a mobile-phone based money transfer service by Safaricom and Vodafone. It functions like a small bank account and

allows to transfer money safely via mobile phone. The system is very common in Kenya, so that you can pay via Mpesa in most of

the shops even in rural areas.

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structural level of Musoni, the level of the loan officers or „Wealth Creation Officers“ (WCO) as they are

called in Musoni. They know every customer personally and attend the weekly group meetings.

3.2 Steps to the First Loan4

To understand the Musoni system one has to know how clients can get a loan. There are some steps

every client has to go through before he can receive any money from the company. They assure Musoni that

the applicant is capable of repaying the loan. The ten steps, that are listed below, include different checks and

analysis of the applicants’ personal and financial situation. Through this elaborated process Musoni wants to

minimize its risks and to lower the number of customers who are not able to repay their loans.

1. Invasion: The WCOs go out to talk to people and to invite them to an information meeting.

2. Information Meeting: WCOs familiarise the potential clients with the lending procedure and inform

themselves about the client’s personal- and business details.

3. Unscheduled Site Visit: WCOs visit the applicant’s businesses and check the information provided by

the applicants. Most applicants drop out at this stage.

4. Individual Registration: Applicants register with their Mpesa identity.

5. Group Registration: A group of at least ten members who have to know each other personally has to

be formed and to be registered.

6. Training: WCOs train the group weekly for four weeks about the terms and conditions of Musoni. In

that period chairman, treasurer, and a secretary of the group have to be elected, a group constitution

has to be put up, and the weekly savings with Co-operative bank must be started.

7. Site Visit: The WCO visits and assets the businesses again. In addition, the WCO does a Cash Flow

Analysis and each client has to make a Collateral Pledge.

8. Group Site Visit: The group visits the businesses of each group member and discusses if they want to

guarantee for the respective member.

9. Credit Committee: The Credit Committee consists of the branch manager and at least two WCOs. The

WCO whose client applies for the loan has to defend the application. He or she is questioned about

details of the application. Furthermore, the applicant’s weekly savings are being checked.

10. Loan: The client receives the loan in a period of 72 hours on his or her mobile phone.

4 The steps can vary between the branches. The following steps are based on the procedure in the Naivasha branch.

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3.3 SWOT Analysis of Musoni

To give a good overview of Musoni, we made a simple SWOT analysis in the following. Thereby we

summarized Strengths, Weaknesses, Opportunities and Threats. The clients’ point of view and the institutional

point are thereby mixed, in order to show where Musoni has challenges to work at and potentials which can be

used to achieve its goals faster.

Strengths Weaknesses

Offers a low interest rate

Comparably good services for clients

Very quick and cheap money-system due

to using MPESA

Proficient client selection process

Long term oriented shareholders who

give a strong financial support

Decreasing risk structures

Some clients use Musoni credits to repay

other credits (credit cycles)

Not enough products for savings and

special loan purposes

Not enough trainings for clients whose

businesses grew bigger

Some WCOs got negative ratings from

their clients

Company is not yet profit generating

Musoni only uses the system of group

lending, this limits their range of

potential clients.

Opportunities Threats

Demand of more products can be used to

gain more clients and refinance cheaply

Possibility to use financial support from

Musoni’s shareholders to grow slowly

but sustainably

A national credit observation tool can

lead to a better control of clients who

have credits at multiple MFIs

Loosing clients because of offering to

less products and almost no individual

loans

Too less turnovers and frequent losses

can lead to the insolvency of Musoni

Through the growth of the microfinancial

market and the expenditure of MPESA,

Musoni can lose its uniqueness in their

money-system and the advantage of their

low interest rate

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3.4 Evaluation of Musoni Kitengela

Faraja Group (hope/joy)

Group members 13

Loan cycle First to Second

Gender Mixed

Establishment of group November 2011

Members individually interviewed 2

Range of Age -

This group was one of the first to be founded within the Musoni Kitengela branch. In the time we

visited them, the members were in their first or second cycle of taking loans and had already gained a lot of

experience with Musoni. Most clients of this group said that they joined Musoni because of a low interest rate

and better repayment conditions than with most other MFIs. All members confirmed that taking up the loan

and investing the money into their businesses improved their financial situation and that non member had

struggles yet to repay. Some of them also answered that they used some of the money for private purposes like

school fees which also improved their family situation. Over the time, the group grew together and they got to

know each other much better. One of the members complained that the training they received from Musoni

was not adequate. Another interviewee reported that he/she would like to have more training on how to

adequately run a bigger business, since his/her business grew with the help of Musoni. Both told us that the

system of group guaranteeing was a good idea, as they have access to a loan much easier; and their WCO is

very open to problems and questions.

Mlolongo Group (Starlight)

Group members 14

Loan cycle First to Second

Gender Mixed

Establishment of group -


Range of Age Approx. 27-43 years

The Clients said that they preferred Musoni to other MFIs because it delivers fast credits through

MPESA and has a quite low interest rate. The clients have different occupations, such as running a shop,

butchery, or a beauty salon etc. The repayment conditions were suitable for all group members and all of them

claimed that taking up the loan improved their business as well as their financial situation. The Musoni staff,

especially the WCOs, present an overall positive image. The group was in favour for the group guarantee and

told that they benefited from the mixed group characters. The two individually interviewed persons also

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suggested that they would like to have further loan and saving products for purposes like school fees, medical

covers or to buy a bigger asset like an own vehicle. One of the interviewed clients recommended that there

should also be more training on savings in order to create awareness and a culture of saving.

Mwanzilishi Group (Starter/Beginner)

Group members 15

Loan cycle Fourth

Gender Only female

Establishment of group October 2011



This group is also one of the oldest groups for Musoni Kitengela branch. It is an women-only group

and is already in the 4th cycle of giving out loans. The clients all said that taking up the loan improved their

businesses, but the improvement always depends on the demand of their customers. The group had some

struggles with the repayment but together with their WCO they solved all problems up to now. They all

recommended that taking up a group loan was far better than having an individual loan, especially because of

their up to now struggles.

Baraka Sokoni Group (“blessed market”)

Group members 18

Loan cycle Third

Gender Mixed




The group has 18 members, of whom some were already clients of other MFIs before they joined

Musoni. These said that they preferred Musoni mainly because of the quick loan giving system. The group

feels much pressurised to ensure that each member pays back their loan. This feeling is mainly due to the fact

that one of the members went away and left the group with repaying the whole sum to Musoni since they

guaranteed for the defaulter. Overall, their financial situation has improved since taking up the loan. The

clients all pointed out that the loans helped to improve their businesses. However, the two individually

interviewed members pointed out that it would be better to have a longer repayment rate and more financial

products. Furthermore, they complained that they had no concrete knowledge about their repayment

conditions.

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Amani Traders Kitengela (Peaceful Traders Kitengela)

Group members 16

Loan cycle First

Gender Mixed




The members are in various businesses including tailoring, selling fish, welding, green grocery, and

retail. Many of the members joined Musoni because of their efficiency and promptness in giving out loans and

because of their low interest rate. Members consider the repayment period feasible. Most of the members’

financial situation has improved after taking the loan. The system of group lending is acceptable for everyone;

however, some would want to take individual loans in future. None of the group members had struggles with

the repayment up to now. The two interviewed clients also recommended that they would appreciate further

loan and savings products, especially for the purpose of paying school fees.

3.5 Evaluation Musoni Naivasha

The second branch of Musoni under evaluation was the one in Naivasha – a small town of

approximately 15,000 inhabitants in Nakuru district. The information for the following assessment was

conducted within a two-day-stay in Naivasha. In the course of the research days the researchers were allowed

to have interviews with the branch manager, Ernest Mbidha, and the WCOs, take part in the credit committee,

and join the WCOs for site visits and group meetings.

a) Individual Interviews

All of the clients individually interviewed were in their second loan cycle and could therefore talk

about their experiences with previous loans. The amount of first loans with Musoni ranges from KSH 5,000 to

KSH 30,000. None of them had experienced major problems repaying the first loan so that they could qualify

for sequent loans. One of the interviewees could even clear the repayment before the stipulated time. The

complaints of the four interviewees concerned the grace period, which they considered as being too short for

the investment to generate profit.

Musoni is not the only institution with which they had taken up loans: One of the clients reported to

use Musoni loans to repay loans at Faulu, another had negative experiences with KWFT before, a third one

used a part of her first loan at Musoni to pay for a defaulter at another MFI. But the main purposes for their

loans were business reasons like expansion or building structures. The overall view on Musoni was positive:

They appreciated the quick and efficient services, the low interest rates, and the business training before the

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first loan. None of them felt left alone by Musoni. However, they felt that Musoni only targets Small and

Medium Enterprises (SME) and request the diversification of the products including individual lending. The

loans improved their businesses as well as their personal situation by raising the income level gradually.

Based on these experiences all of the interviewees paint an optimistic picture of the future and expect their

businesses to grow further. One of the interviewees does even have business plans with his Musoni group:

They want to accumulate enough money to buy a piece of land, subdivide it and later sell it when the prices

have gone up.

b) Group Interviews

Pamoja (“Together”) Self Help Group

Group members 13

Establishment of group August 2012. All of them are motorbike operators (Bodaboda).

Loan cycle Training period, applying for first loan

Gender Male only

Members individually

interviewed

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Range of age Approx. 24-27 years

The Pamoja group is a very young and newly formed group. At the time of the visit they have only

been in their fifth week of training. None of the members has received a loan from Musoni yet, which is why

they could not talk about their experiences. The group forms an exception in Musoni since it comprises of

only Bodaboda operators. Normally Musoni wants a lending group to consist of different businesses. The

branch approached these young men through marketing. Nevertheless they all have future expectations related

to the coming loans like diversifying their businesses and start SMEs in branches other than Bodaboda.

Total Self Help Group

Group members 14


Loan cycle Second

Gender Mixed


interviewed

13 (1 missing who has problems to repay)

Range of age 25-35 years

The Total Self Help Group has put up a constitution to govern its conduct including a KSH 100 fine

for absenteeism. The group has experienced trouble in the past; some of the members have quitted the group

due to pressure. After the group members had been marketed by Naivasha WCOs and got loans to boost their

businesses, all agreed that the loans were helpful for that purpose; one member used the loan to pay school

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fees. They argued that the loans are best for persons who have different sources of income, because otherwise

the grace period is too short to create the surplus to repay the first instalment. The members attending the

group meeting claimed to have no problems to repay their loans, but there was one member missing who had

such problems. The situation of taking a loan to offset another loan is common in the group, if one of them is

client of another MFI. The training provided by Musoni was considered as being helpful, Musoni is perceived

as being fair in comparison with other MFIs. The group members experienced an improvement of their

personal situation due to the loans and want to go ahead with the group since it is cohesive.

Suswa Self Help Group

Group members 12

Establishment of group Started with 8 members only, group members commute from Narok to

Mai Mahiu for the weekly meetings.

Loan cycle First and second

Gender Male only


interviewed

12

Range of age 24-40 years.

The group has a constitution which does not allow members to be clients in another MFI than Musoni.

Before the group was formed some of the members had been clients to other MFIs like SMEP or K-Unity.

Indiscipline is not tolerated in the group and can lead to expulsion from the group. They have a group internal

fund to cater for late repayments of the loan amongst the members (table banking). One of the members

struggled to repay his loan due to a drought which destroyed his harvest, but could manage to repay it through

other means. There were no other problems with repayment so far. The group members did not know the

exact interest rate, but only the amount they had to pay weekly. Just like the other groups they considered the

grace period as being too short but claimed that their personal situation had improved through the loans. In the

future they want to dig boreholes at their homesteads since they all come from a semi-arid area and they want

to commercialise agriculture.

Umoja Thioro Self Help Group

Group members 13

Establishment of group Started with 3 members only, from different SMEs.

Loan cycle First

Gender Mixed


interviewed

13

Range of age 30-50 years.

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The group members were former clients of other MFIs like Equity Bank and K-Unity. They have a

minimum savings contribution of KSH 200 per week. The group cohesion is very strong and the members are

encouraged to share the experiences they are going through. Just a handful of the members have received their

first loan so far, which ranges from KSH 5,000 to KSH 10,000. The members appreciated the training and did

not experience any problems with repayment until now. Nevertheless, they have a fund set aside to crater

misfortunes. Except from the short grace period and Musoni’s target on SMEs only, they have no complaints

about Musoni. The group wants to buy land together, subdivide it and sell it later when its value will have

been appreciated.

Mai Mahiu Ushindi Self Help Group

Group members 16 members.


Loan cycle One member in second cycle, others in first.

Gender Mixed


interviewed

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The group has undergone some shakeups and the group cohesion is not very strong, because some

individuals left the group after receiving their first loans and the members left behind had to repay the loan for

them. The minimum savings contribution is KSH 150 per week. As per group internal regulation the first loan

must not exceed KSH 5,000. This helps the members to evaluate an individual’s repayment ability. A number

of members had problems with first instalment repayment issues. The group at one time was forced to repay

loans for two defaulters who ran away. They experience pressure from the group members and the WCO to

repay the loans. Musoni is evaluated as being generally good, quick and efficient and is preferred to bank due

to its low interest rates. As some of the members are not in businesses they want to start up with the help of

Musoni loans in the future, the others want to expand and keep on improving their income.

3.6 Conclusion of the Individual Client Interviews

Most of the clients said that their financial situation really improved after they invested the money of

their loan into their businesses. The largest part of the interviewees also evaluated their decision to have taken

up a loan at Musoni positively. On the contrary, some criticised that there was not enough training, especially

on saving issues and on how to handle a bigger business. The contact to the MFI via the WCOs, who represent

Musoni in the field, was mostly seen as a supporting and friendly one, but again some clients complained that

their WCOs are arrogant, too strict and that thereby they do not have a good relationship with the Musoni

staff. Another recommendation for Musoni was to create more products, such as saving products, health

covers or loans for school fees. Repaying the loan was no problem for the majority of the clients, but the

15

suggestion was made that the grace period should be longer – this would allow clients to have more time for

investing in more expensive and rare assets. Overall it can be summed up that every client appreciated the fast

and easy MPESA-system which enables Musoni to save a huge amount of transaction costs and thus charge

low interest rates. The idea of group lending with mixed groups was also perceived as very positive, because

most of the clients said that they profited from such a group in the way that they mutually complement each

other very well and became like a big family.

3.7 Institutional Conclusion Musoni

Musoni is the first MFI in Kenya that focuses on delivering credits via the mobile phone system

MPESA. This System has been adapted very well by clients and been evaluated as very fast, helpful and easy

to handle for the clients. But there are several obstacles for Musoni to be crossed in the next few years. At first

there is a problem of clients who apply for several MFIs and use their credits to repay credits at other MFIs or

to do things that are not related to the reasons they took up the credit for. This leads to frequent defaulting and

constitutes a problem for the whole microfinance market in Kenya. At the moment it is planned to construct a

countrywide observation office which registers every client who takes up a loan. This is meant to assure that

this “credit hopping” and stabilize the market in this issue. Another important fact is that Musoni as a whole

institution has only made losses up to now. So far the shareholders are patient and support Musoni financially

to ensure a slow growth to assure a high repayment rate. But after all Musoni has to grow in the next years and

handle its cost structures in order to create profits and reach its target to become financially self-sufficient (cf.

Musoni 2012). A last issue to think about providing special trainings for clients whose business has grown

above certain borderlines. These clients need advanced business trainings to be able to achieve more growth.

This will assure possibly higher credits for those groups of clients hand in hand with a potentially high

repayment rate for these credits.

4. Second Case Study – DISC Initiative

4.1 About DISC Initiative

The DISC Initiative is a registered organization in the village Ol Donyo Sabuk. The main purpose is

to support the community of the village through different programmes like a youth sports programme, a

library for school kids or an IT-Centre. Despite these, there is a microfinance programme for all-female

lending groups. At first, this arrangement was taken up to support the DISC Ladies Alive programme which

helps young women, who had to quit school because of pregnancy or unaffordable high school fees, to again

attend school and to provide sexual education for them. Unfortunately, the DISC Ladies Alive programme

was not able to provide education for all participants and so the first loan group named “Youngstars” was

16

DISC Initiative Established in: 2011

No. of clients: 29

No. of employees: ~ 3

Branches: 1

Status: NGO

Area: Mainly urban

created. The idea of the microfinance programme was to empower these

women economically by providing them with cheap microloans and the

opportunity of formal savings. Due to first struggles and a broad demand in

the community, DISC has opened its microfinancial services to two more

groups, the “Kyenichaka” group and the “Wikwato” group.

The microfinance programme works by giving out loans to all-female

lending groups, in which each member mutually guarantees for each other. The members decide together

whether a member is allowed to be granted a loan through the group. For collateral, the group has access to

the savings of each member and some predefined household assets. To become a member of a group, one has

to be accepted by at least 66 % of all group members. DISC also provides trainings for the groups in issues

like group dynamics.

4.2 Steps to the First Loan

To better understand the group lending system of the DISC in comparison to other group lending systems,

this chapter has the purpose to show the individual steps the women have to go through in order to receive

their first loan.

1. Information: Either, the members of the DISC go out to talk to people and to invite them to an

information meeting, or the women themselves come to the DISC asking for information about

getting a loan.

2. Registration: Either a group of women who have to know each other personally has to be formed and

registered, or a new member can enter an already existing group of women if 66 % of these know her.

There can be a maximum of 15 women in one group. The registration fee is KSH 200 once for each

member of the group.

3. Training: DISC supports the new groups with weekly trainings for six weeks giving information

about savings, budgeting and group dynamics. In that period chairman, treasurer, and a secretary of

the group have to be elected, a group constitution has to be put up, and the weekly savings must be

started. New members are supposed to learn from other women and can get additional help from the

DISC staff.

4. Savings: All women have to save a minimum of KSH 50 weekly over six weeks, before getting their

first loan.

5. Loan: Women receive their first loan of KSH 5000 through the staff of the DISC.

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4.3 SWOT Analysis of the DISC Initiative

To give a good overview of the DISC Initiative, we made a simple SWOT analysis in the following.

Thereby we summarized Strengths, Weaknesses, Opportunities and Threats. The clients’ point of view and the

institutional point are thereby mixed, in order to show where DISC has challenges to work at and potentials

which can be used to achieve its goals faster.

Strengths Weaknesses

Repayment rate of 100 %

Strong loyalty of the clients

Strong intergroup relationships of the

women

Good group contracts that assure an

effective self-selection-process

Trainings for clients help to empower the

clients business

Use of existing businesses

Increased the culture of savings

No refinancing costs, because of funding

through grants

Higher social status in the village for

clients

Positive impact on financial & personal

situation of the clients

Limited market potential of the local

market

Clients with similar businesses do not

cooperate

Refinancing is mostly depending on

external grants

Up to now no experiences with

repayment struggles or defaulters

Costs of accommodation, electricity,

water and staff salaries have to be paid

Opportunities Threats

Business cooperation and joint projects

of the clients bear huge growth potentials

Savings can be used as a cheap way to

refinance

Further grants could help to increase the

Land can be taken away from farming

ladies

Dry periods can lead to the default of

whole groups

Competition with banks about interest

18

loan portfolio

Experienced group members can support

new group members

Older members can help young members

to grow step-by-step

rates

Lack of refunding could lead to high

interest rates or even the collapse of

DISC

Defaulting can lead to social problems

because of strong relationships between

clients

Limited local market potential represents

a growth limitation for farming ladies

New members have to wait for trainings

4.4 Evaluation of Interviews

Wikwato (“Hope”) Lending Group

Group members 11

Establishment of group First merry go around group, established as a lending group in

June 2012.

Loan cycle First

Gender Female only



All group members are in their first cycle of loan and received the same amount of money of KSH

5,000. Six members reported an interest rate of 10% for a repayment period of six months. Three of the six

interviewed women invested in their farming- and greengrocery business and three only in their greengrocery

shop, of which one also explicitly needed the half of her loan for the high school education for her son. They

stated that the weekly repayments of KSH 115 additional to a minimum of KSH 50 savings were of no

problem to them. Two were even able to save more than the minimal amount; two clearly aimed at saving for

their retirement. All of the interviewees were happy to report a truly positive change in their lives: for

instance, everyone’s business improved due to their loan. Furthermore, the ones with younger children were

not struggling anymore with paying school fees as they were before the loan. One major difference that could

be investigated that one woman was able to improve her livelihood to the standard of buying some additional

furniture, whereas another woman was just able to improve in so far that she could satisfy her children’s basic

needs, such as food and clothing. From each interview it could be observed that the women were very

19

satisfied with their MFI and especially with their training programmes which contained teaching in budgeting,

saving, debt management, and financial services. The chairlady of the group also pointed out that she was

very pleased with the group dynamics, since they even are advising one another in their businesses. All of the

six interviewees expected further improvement in their lives and businesses with their second loan and some

even dreamt of putting up other businesses than farming, such as cattle rearing or professional merchandising.

Kyenichaka Lending Group

All group members are in their first loan cycle and received the same amount of money of KSH

5,000. Two members reported an interest rate of 10% for a repayment period of six months. The first

interviewee invested her loan into her farming business to buy seeds, water piping system, and to create more

space for growing her agricultural products. The second woman sells traditional jewellery and used her loans

for enlarging the variety of her product range. The latter one reported no concrete problems with her weekly

repayment of KSH 115; however she is only able to save the minimum amount of KSH 50 per week. The

second woman also reports no struggles with her repayment; however she has to work hard for it. The

personal and financial situation for both women improved a lot due to the loan they got: One is now able to

concentrate on her own farming business without having to search for other places to work outside her village.

She even employed two workers to help her harvesting. The other interviewee emphasised the importance of

lending from a professional institute rather than from friends, since lending from friends caused many

disturbances within her social relationships. The first one to be interviewed highlighted her wellbeing in the

group, although she is aware of the risk that if one group member defaults, everyone has to pay for her. Both

agreed on a positive evaluation of the MFI, and were specifically satisfied with the provided trainings. The

first woman aims at saving enough to be able to retire in the near future, whereas the other woman aims at

getting her next loan to further improve her business and to build her own house.

Group members 9

Loan cycle First

Gender Female only

Establishment of group Spring 2012



20

Youngstars Lending Group

Group members 6

Establishment of group Spring 2012

Loan cycle First loan cycle for most members, only one is in second cycle. One is

still waiting for her loan.

Gender Female only

Members interviewed 3


Most group members are in their first cycle of loan and received the same amount of money of KSH

5,000 with an interest rate of 10% for a repayment period of six months. Only one member has already repaid

her first loan and has taken the second of KSH 10,000. One of the three interviewed women has already

applied for a loan, but will not been granted the money before October 2012. She plans to use her loan to open

up a shop for household utilities. The other interviewees sell sodas and self-made chips at a tourist attraction;

both businesses were started up with the help of the lent money. However, they even reported to have also

used their own savings additionally to the loan for that. Both interviewed women who had already taken up a

loan reported to pay back KSH 200 per week, which is more than the minimum amount of repayment.

Nevertheless, they only saved the minimum amount of KSH 50. Both improved very much through their

loans, since neither of them had any income of their own before that. One even stated that she nowadays is not

dependent from her husband anymore and does not have to “go to bed hungry anymore”. Both highlighted the

helpfulness of the trainings provided by the MFI as well as the advice given to them by other, more

established groups. Both dream of accomplishing their education whilst growing their businesses.

4.5 Conclusion of the Individual Client Interviews

As seen above in the evaluation of the individual interviews the perception of DISC Initiative is

overall very good. All of the women reported an improvement of their financial and personal situation.

Almost every woman was very satisfied with the trainings provided by the institution. The only problem

appearing is the incomplete training provided to newly joining members of the lending groups, since training

sessions were already held for the old members, but not repeated yet for the new ones. There is no official

regulation of that problem. Therefore, it appears that new members are only insufficiently trained before

receiving their loan. The interviewed women are all looking forward to take their second loan of KSH 10,000

and have all a very optimistic view on their future.

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4.6 Overall Conclusion of DISC and Proposals

The DISC Initiative has a loyal relationship with its clients and the community of Ol Donyo Sabuk

through its different programmes as well as an excellent repayment rate of 100 % for its microfinance

institution. The microloans given by DISC have a very positive impact on the financial and personal situation

of the clients. Apart from financial empowerment, the programme provides education in business and intra

group issues for the clients and helps to empower the community.

But there will be future challenges for DISC, for example to become independent from its external

funding and to become financially self-sufficient in the next five years, as planned. Other threats are external

problems, such as dry periods. As a solution to the issue of refinancing, it is proposed to reorganise the

microfinance project as a joint SACCO of the three different lending groups together with the DISC Initiative.

The loans could then be provided through both the savings of the groups themselves and the money that DISC

would provide as their “savings”. Thereby, DISC could become a silent shareholder of the SACCO and would

encourage the clients to take up more responsibility on their own. Another aspect is that this SACCO would

be independent from external funding on the cost of a limited loan portfolio at the beginning. But this system

would enable a slow step-by-step growth for the institution in combination with a long-term capital

accumulation for its members.

5. Evaluation of Further Microfinance Institutions

In the course of the research further institutions apart from Musoni and DISC Initiative were

evaluated. The difference between those two institutions of the before assessed case studies and the

institutions in this chapter is the extent to which they have been evaluated. At both SISDO and Vision Afrika

SACCO the research group was only able to spend one day to do interviews with staff and clients. Therefore

the results of the evaluation are on a more superficial level than those of the first two case studies.

Nevertheless, SISDO and Vision Afrika SACCO are both suitable examples for two different ways of “doing”

microfinance. Especially the SACCO model of Vision Afrika is a positive example for a community based

MFI.

5.1 SISDO

SISDO is nowadays a commercial microfinance institution concerned with providing “reliable and

affordable financial services to entrepreneurs for wealth creation and improved livelihoods,” which the MFI

understands as its very core mission (SISDO 2012). To do so, it offers its members a great variety of different

financial products – for example products for business uplift (Inua/Daraja), for agricultural purpose

(Ukulima), asset financing (Mali), for cases of an emergency (Dharura) or to pay school fees (Elimu). SISDO

(Smallholder Irrigation Schemes Development Organization) became an independent MFI in the year 2003

with a focus on rural and urban financial services delivery to low-income communities. Before, it had been

22

SISDO Established in: 1993

Branches: 5

No. of clients: no

information

No. of customers: no

information

Status: Commercial MFI

Area: Mainly urban

Area: Mainly urban

established in 1993 “through the advice of the Ministry of Agriculture and

approval of the Ministry of Economic Planning with the mandate to develop

the smallholder irrigation sub-sector. SISDO’s mission then was to develop

the irrigation and drainage systems for small-scale farmers on a sustainable

basis and to promote horticultural production through provision of credit.”

(ibid.) The branch visited in the course of this research was located in Huruma,

Nairobi. There, we had the opportunity to conduct interviews with the branch

manager Joshua Nuinde, one lending group, as well as two individual interviews with clients of SISDO. It was

not possible to conduct a full survey of SISDO, thus the following analysis will only concentrate on the client

interviews and the recommendations given by the interviewees superficially and will not go into detail.

In the evaluation of SISDO as a microfinance organisation it became obvious that it is doing its best

to create financial support to its customers as an empowerment to their business venture. This is a good start,

but on the other hand they have failed in capacitating their clients in terms of equipping them with financial

literacy knowledge. All of the conducted interviews pointed out the same problem: SISDO’s focus is based on

training the group leaders only instead of each member of one lending group. Most leaders do not pass on the

information onto the group members effectively, as almost every interviewee criticised. This has led many of

its customers to access huge loans without the necessary skills of how best they could invest the money as

well as how best they would manage their business. This is the reasons why many customers end up losing

their businesses and facing problems in their efforts to make the repayments, or default at all. For example:

during our interviews we came across one group member who took up a loan to invest in his business which

failed at last; he attributed his failure to lack of training as one of the major factor. We also came across

several others who were into their fourth and fifth cycle of loans and had never received any formal training

which would have been the very key in their decision making towards their investment as well as their debt

management.

As a closing remark to the evaluation of SISDO it has to be made clear that training for all members is

not only recommended, but highly necessary and will drastically reduce the number of defaulters within the

microfinance institution.

5.2 Vision Afrika SACCO

Vision Afrika SACCO has a basic difference to the other institutions evaluated in the course of the

research. It is organised as a SACCO. SACCOs differ from MFIs and banks in that way that the members with

accounts in the credit union are at the same time the owners/shareholders of it. This system implements a

democratic structure with a one-person-one-vote system and dividends for each member at the end of one

business year. Therefore, the members of the SACCO feel a much stronger connection to it than they might

have to regular banks. The members interviewed at Vision Afrika SACCO really considered themselves as

owners of the cooperative with a strong sense of community.

23

Vision Afrika

SACCO Established in: 2004

No. of members:

~10,000

No. of employees: ~40

Branches: 3

Status: SACCO

Area: Mainly rural

Vision Afrika SACCO was founded in 2004 under the name Gilgil

SACCO by only two persons (Nahashon Thuita and David Ndung’u Mungai)

who had negative experiences with the informal credit sector, the so called

shylocks. Their project aimed and still aims at small, unbanked business people,

who do not have securities (for example title deeds) to get loans at regular banks.

Until today the SACCO has been growing to a total number of 10,000 members

and three branches in Gilgil, Nakuru and Naivasha. The staff in these branches is

as large as forty employees.

The concept of SACCOs combines both saving and giving out credits. Each member has to save as

little as KSH 20 per day, put it in his Home Banking Kit (HBK) and take it to the SACCO personally once in

a while. By doing that, one qualifies for a loan after having saved for three months. The biggest amount of the

first loan is KSH 15,000, for sequent loans the maximum is KSH 500,000. These loans are given out to the

members at an interest rate as low as 1.25%. Additionally, every member who wants to receive a loan needs

three guarantors from within the SACCO who will have to stand in for the respective member in case of

failure to repay. The repayment period is flexible but the repayment has to be done daily. This measure forces

the clients to save constantly and reduces problems with the repayment. There is also business skill training

for the members and advice given by other members within the guarantee group. These are the so called Back

Office Surface Activities (BOSA). The Front Office Surface Activities (FOSA) offer banking services other

than loans and can be used also by non-members.

Vision Afrika SACCO is not funded by any external institution but is only financed through the daily

savings and the small interest rates. It only grows and expands in a way the SACCO can afford. Other than

MFIs it does not have to grow to work profitably, it is sustainable the way it is today. As it is organised as a

SACCO, Vision Afrika is an exception in this research and cannot in any way be compared with the other

institutions. The bottom-up way of Vision Afrika SACCO is an example of how financial institutions can be

organised in a cooperative way.

Vision Afrika SACCO had been evaluated by three researchers who visited the Naivasha branch and

were allowed to do interviews with two members of the staff (Stephen Mwangi Weni and Hilda N. Njoroge).

All the members interviewed had made negative experiences with regular banks and were disappointed by

their high interest rates, bad services, and the hidden charges in the terms and conditions of the banks. All

these things are completely different at the SACCO where the interviewees do not feel as customers but as

members and as part of a collaborative project. The interviewees made clear that it is not only because of the

low interest rate at the SACCO that they became members. Equally important is the personal contact to the

staff, who talk to members on the same level. This close relation to the members reduces failures of

repayment. None of the interviewees, neither members nor staff, could remember even one case of serious

repayment problems which could not be solved by adjusting the repayment period. Vision Afrika SACCO

tries also to involve children and youths in the savings cooperative to make them familiar with the concept of

24

saving from early on. The SACCO therefore does not only operate sustainably in itself, but also tries to have a

sustainable impact on the community.

SACCOs are a an alternative way of organising financial institutions and the example of Vision

Afrika SACCO shows that this way can work without external funding.

6. Microfinance – a Blessing or a Curse? Two experiences

The question if Microfinance can be a successful strategy for poverty reduction is not an easy one. In

the course of the research the group got to know many people, each of them with a personal story. Two of

these experiences are told in this chapter. They represent the extremes of the experiences the group came

across. Nancy (Experience I) lost all her belongings since she took up a microloan and is desperate about the

situation microfinance brought her in. Joseph (Experience II) was able to progress both his financial and

personal situation by taking up microloans. The two examples show the broad range of experiences with

microfinance and where microcredit can lead to both positively and negatively.

Experience I

Nancy M. is a woman of 35 years. She has got two children of 9 and 5 years, a husband who works

far away and comes home only once a month, but other than that she owns nothing at all. Once she had been

an established farmer, owned a cow and over 200 chickens, nowadays she has to struggle to feed her children.

Her story begins in August 2011, when she decided to take up a loan with the well-known Kenyan

microfinance institution KWFT. That month she urgently needed some money to invest in her farming

business, and to buy seeds to grow maize. Therefore, she took up a microloan of 100,000 KSH with an interest

rate of 17% per year. The repayment period she was given by the MFI was 12 months. So, from September

2011 onwards she had to pay an amount of 10,000 KSH monthly to her credit institute, additional to 1,400

KSH she was supposed to save each month as some kind of collateral. In the beginning, this worked out fine

for Nancy. She started buying goods for her farming business, and to repay her loan in time each month. Then

came the draught. All the crops died on the field and her business was destroyed totally. That was when the

problems started: From April 2012 onwards, she struggled with her monthly repayments and had to ask the

MFI for more time – but in vain. Only one week after she mentioned her inability to pay, the MFI came and

took all of her belongings to sell for a throwaway-price and to balance her loan with this. From this time on,

her loan officer came regularly to put her under pressure – at daytimes and nighttimes. Additionally to the

psychological pressure put on her, she even lost her face in front of her neighbours who were well aware of

her situation since the MFI did not act in confidentiality at all. Today, she still is to pay the remaining balance

of 5,400 KSH and lives under permanent fear from her loan officers who will not stop harassing her until her

loan has been cleared all together. A friend of Nancy, Mary N., also defaulted with the same institution. She

once owned her own shop and bakery. When she failed repaying the first month, the MFI came to clear her

house and to take her baking items. With this, they took the only source to generate income and the only

chance to ever pay back her loan using her business.

25

(Source: Interview with Nancy M. and Mary N. from Gilgil. When being confronted with those cases, the

affected MFI gave no comment and threatened with legal challenges. Therefore, the reported experience can

unfortunately only depict one side of the story.)

Experience II

Joseph M. is a client of Vision Afrika Sacco Ltd. who was born into poverty and owned nothing, but

managed to put up and grow his own business. Today, he is a wealthy and well-respected member of his town

community.

“I am aged 40 years and father of 3 children. I have come from a very poor background. I opened an

account with Barclays Bank in 1993 and after saving for two years I had saved KSH 10,000 and 1995 I was

dismissed from my place of work as a Restaurant attendant. After three years I went to withdraw my cash but

I only managed to get KSH 900. I was forced to close that account. I have also joined Equity Bank and I only

took one loan and found that they had hidden charges. I joined Gilgil Sacco (Vision Africa) in the year 2010. I

could only save KSH 20 per day and after 6 months I carried the first loan of KSH 15,000. I started a business

and repaid in 6 months. I took the second loan of KSH 30,000 and I planted wheat in my Nyandavua 3 acre

piece of land and I harvested 60 days and sold at KSH 3,000 each, I got KSH 180,000 and I bought a plot

worth 150,000 in Kayale Naivasha. I have since then build (a house) and I bought a motorbike with the third

loan and I am still farming and saving. I am very proud to be a member. I am also undergoing a theology

diploma course.

I am member number 2357.”

7. Overall Evaluation of Microfinance

7.1 Impacts of Microfinancial Services on the Clients’ Financial and Personal Situation

Overall, a great number of both positive as well as negative impacts of microfinancial services on loan

takers had been detected. The following table summarises those impacts in both the client’s financial as well

as personal sphere. The loan takers report a positive financial impact as they have now access to financial

resources. This access helps them to grow economically and also improve their social status in their

community. However, loosing these financial resources in the case of defaulting is a dramatic problem which

pushes people into a situation of social exclusion and high community pressure.

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Positive Impacts Negative Impacts

Financial Impacts Possibility to start a

business.

Improvement of business

Culture of saving.

Access to bank accounts.

Increased income.

Overindebtness due to

failing business.

Loss of savings and assets

in case of defaulting.

Loss of source for

generating income in case

of defaulting.

Mutual guaranteeing.

Personal Impacts Ability to send children to

school.

Higher social status in the

community.

Financial education and

knowledge of debt

management, group

dynamics, book keeping

and savings.

Social networking

through group lending.

Social exclusion in case of

defaulting.

“System of shame” put on a

defaulter by the MFI.

Group pressure.

7.2 Institutional Challenges

Additionally to individual problems of each MFI, microfinance as a whole is facing certain

institutional problems in Kenya which hinder its ability to tackle poverty sustainably and effectively. One

important aspect is that, up to now, there is no central institution that is backed by law to control credit takers.

This opens the market for the above introduced problem of MFI-hopping and credit-cycles. Clients who are

not recorded by a supra-institutional agency are able to join several MFIs and take the given loans to repay

others. This leads to a very high indebtedness which cannot be solved easily and often leads to a complete

fallout of the respective client. However, such a registry is in a pilot phase in Kenya right now and is to be

introduced in the years 2013/14.

Another problem is the strict law situation for deposit taking banks. Only few MFIs are allowed to

offer public bank accounts to their clients, which would mean a comparable cheap source of refunding.

27

Another big source of refunding is the Kenyan Central Bank which yields a high interest rate for its credits6.

Because this is the interest rate at which banks can lend money from the Central Bank, its the base of interest

rates from other banks to refinance. Other sources of refunding are other financial institutions which are

usually even more expensive than lending from the Central Bank, shareholders or external grants. This leads

to high interest rates on micro loans for the clients and thus limits the growth potential and the ability to tackle

poverty.

After all there is still the question which goals a MFI wants to achieve, how fast this should be done,

and of which kind the financial background of the MFI is. Musoni, for example, has a strong and long term

oriented shareholder structure which gives the MFI the opportunity to grow slowly, have less defaulters and

thereby assure a high repayment rate. Other MFIs such as Rafiki DTM (Deposit Taking Microfinance) have to

be profitable after two to three years. This causes high interest rates and a fast growth of their customer base.

In comparison, SACCOs are financially independent from external funding because they have the ability to

finance themselves through the savings of its members. This opens the field for a possible mid-term growth

that can be very sustainable and especially builds a strong capital stock for its members through some years.

Furthermore, there is the possibility for a MFI to work as a small NGO such as DISC Initiative. Their goal is

to enforce local society and help people to grow out of poverty and be self-sufficient. In comparison to profit-

oriented MFIs, the NGOs fund themselves mostly of external grants and the small surplus they get from their

issued loans. This poses a huge potential to issue credits at a low interest rate which then gives the clients

more potential to grow out of themselves and take more profits from this growth for themselves. But facing

this potential then stands the problem of getting frequent refunding.

Overall on the institutional level, microfinance bears the potential to enable poor people by helping

them to build up a business or to help them taking bigger steps with an existing business. But then there is the

question whether the mission of a respective MFI is to assure this growth potential or to be a financially self-

sufficient company with a focus in profits and interest rates of its shareholders. Another unanswered question

is up to know the mentioned observation mechanism at state level. And at least there is a problem within the

formal selection and self-selection processes for the MFIs to reach the poorest of the poor. These people have

no collaterals, no savings and are mostly not able to reach requirements from the MFI nor to be accepted by a

lending group.

7.3 Clients’ Recommendations

When conducting the interviews with individual clients of various MFIs one question that had been

asked was about recommendations to the MFI. The recommendations that were gathered by listening to the

clients’ experiences have to be looked at carefully, though. On the one hand, they are by those, whose lives

were affected most by microloans and who had either suffered or succeeded under the system of microfinance.

6 Last available information is the Central Bank interest rate of 13.0 % at September 2012 (cf. Central Bank of Kenya 2012).

28

From this involved perspective the clients may see problems and weaknesses which the officials are most of

the time unable to detect. On the other hand, those recommendations do lack a broader perspective, for

example economic necessities of the company, and therefore are not always fully valid. Nevertheless, the

clients’ recommendations show why microloans are not always a successful strategy for poverty reduction,

but that most microfinance institutions need adjustment in the manner and strategy in which they are giving

out loans. The clients’ recommendations collected in Kenya can be summarised in three points:

1. Longer grace period: The most mentioned recommendation is a longer grace period. In the client’s

opinion the period until they have to repay the first rate of their loan is too short. They argue that in a period

as short as one week, which is the common grace period in most MFIs, the loan cannot be invested and make

profit. Therefore, they have to use a part of the loan itself to repay it. That does not make sense from their

perspective. From the institutions’ point of view the grace period has to be as short as possible. They only start

making profits by the time the client starts repaying. The MFIs defend such a short grace period as follows: if

the institution decides to accept an applicant and gives out a loan, they are convinced that the client is more

than able to repay it, no matter if the investment has created a surplus yet.

2. More flexible products: Many clients want products that fit their lives better. For instance, loans

which you can pause repaying for a certain amount of time, or loans which allow you to reduce their rates.

Especially for farmers who depend on the success of their harvest, more flexible products are necessary. Most

important for the clients is that they can go to their MFI and tell them about their temporary financial

problems and find a solution together. Right now, clients of bigger MFIs still try to hide financial problems

for fear of being fined for late repayment. Especially clients of KWFT reported that there was no flexibility at

all; clients of Vision Afrika SACCO stated that they could handle their loans flexibly through personal contact

with the SACCO.

3. Better training: There is a period of training in all MFIs evaluated before clients are given their first

loan. However, many clients still feel left alone once they have received their loan. Therefore, many clients

recommended more financial training, even during loan repaying periods, not only before being accepted for a

loan. This is a service offered by the institutions which is, in the beginning, a further investment for the

company, but will pay out later when it can reduce the PAR.

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8. Conclusion

This paper has discussed the research in progress on Microfinance – an approach to successful

poverty reduction? The collected data from various kinds of different microfinance institutions and their

clients was used to give an overall picture on the research question and to evaluate it thoroughly.

Can microfinance work as an effective method for a sustainable reduction of poverty in developing

countries? The answer to this question cannot be given easily.

To sum up the research findings, it is evident that the majority of MFIs is disbursing their loans to

groups only and gives clients no opportunity to be granted an individual loan. The lending groups always

encounter pressure from within and from the outside – meaning from the other group members as well as from

the MFI’s responsible loan officer. This creates strong group cohesion and makes it a key factor for the

repayment patterns of each individual loan taker. It was observed that in a group where members had stronger

ties and were more cohesive, the individuals had little or no problems with loan repayments. Overall, a slight

improvement of the members’ business income, personal as well as their financial situations, could be traced

back to the effect of their microloans. The converse is true to a less cohesive group.

Individual interviewees of the various MFIs were of the opinion that the repayment structures in place

were wanting. They argued that the grace period of, sometimes only, three days was too short. According to

them, the grace period for microloans should be extended in order to give the invested money time to work

and make profit. Cases of individuals using part of the loan to repay their first repayment installment were

also cited.

Nevertheless, MFIs have positive as well as negative effects. Among the positive ones are the

possibility for clients to start up a business, as well as the introduction to a culture of saving amongst the

borrowers. Similarly, some customers’ businesses improved, and hence their incomes, due to the financial

literacy provided before taking up the loans. Some cases in which parents were being able to send their

children to school due to the loan given by the MFI were also noted. On the contrary, some individuals

stumbled into overindebtedness after their business failed and they defaulted with repaying their loan to the

microfinance institution. Most of those defaulting lost all their assets and household items to the MFI. Once

this stage had been reached, most defaulters were pushed even deeper into the poverty trap than they had been

before.

Therefore, it has to be concluded that microfinance is by all means no panacea for the reduction of

poverty in developing countries. Sure, it gives some more people the opportunity to take part in the banking

system, get a loan for starting up a business and thus start working their ways up and out of poverty. But, and

this is one of the major problems of microloans, this is only true for a restricted part of the poor. Even such a

highly and often praised “miracle cure” as microloans are not able to help the poorest of the poor free

themselves from the extreme poverty they were born into. Even microloans are not given completely

collateral-free – one still has to mutual guarantee for the rest of one’s lending group and have collaterals ready

such as household items.

30

Another restriction of microfinance is the division into commercial and funded MFIs. Non-funded

MFIs depend on their customers repaying their loans and their (mostly immense high) interest rate. Therefore,

defaulters are punished very cruelly in some of the evaluated commercial MFIs and the clients are left poorer

than before.

The last risk to mention is the failure of microfinance institution to offer obligatory training sessions

to their clients to properly train them in fields like financing, saving, debt management and how to handle a

business. The cost for such seminars will then be paid out later when the PAR could be reduced due to those

courses. Another recommendation, next to the urgency to provide trainings, is to not only offer micro loans,

but also insurances to the customers. Many clients default because their agricultural business was destroyed

by draught; they got ill and could not work anymore to repay their loan; or they got robbed of their assets. In

such cases, insurance could immensely help the affected to reduce the danger of defaulting and slipping into

poverty.

To conclude this research, it can be said that microfinance, when correctly implemented and under

consideration of above mentioned recommendations, can work as an effective method of poverty reduction.

However, without such essential preconditions as proper trainings, background-information about the client,

active culture of saving, and insurance, microfinance is most likely to fail.

31

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