What Is Microfinance?
Microfinance is an array of financial services such as loans, savings, and insurance that is specifically targeted towards people who would not qualify for these same services from conventional financial institutions.
Microfinance as a financial sector emerged out of the need to allow more financial inclusion to those who traditionally lacked access to banking and financial related services.
In fact, before the microfinance industry, many people had been borrowing money from the informal and shadow financial institutions that ended digging them in more debt.
Even though these informal sources are still in use, the microfinance industry offers people a regulated source of financial services that has led to more financial inclusion among the unbanked and underbanked in society.
The Central Bank of Kenya has even made it their mission to expand the microfinance industry to further meet the needs of the unbanked and underbanked through instituting more reforms and expanding the access to financial services.
However, following some the recent improvements and developments in the microfinance sector which started out as a source of financial inclusion for the poor in society have now become institutions that now exclude the poor.
This is because microfinance has become a proven profitable sector with a high recovery rate that exceeds any other financial institution.
Some microfinance institutions offer extremely high interest rates in order to recover their investments and thus defaulting their credit lines can have serious implications.
That said, microfinance has a variety of products and services that are still beneficial to many individuals and entrepreneurs.
Microfinance in Kenya?
Microfinance is financed through a microfinance institution or MFI and they ideally range from small non-profit organizations to large banks.
The concept primarily originated in Bangladesh but today, microfinance can be found in many parts of the world. Locally, it plays a major role in the Kenyan economy.
According to the Microfinance Act of Kenya which was passed in 2006 and became active in 2008, by 2010, there were 24 large microfinance institutions in Kenya with Equity Bank having the largest share of business loans representing a market share of 73.50% followed by Kenya Women Microfinance Bank with 12.06%.
With the increased advancements in mobile technology in Kenya, most MFIs use M-Pesa to provide microcredit and microloans through the platform M-Shwari to their clients.
The benefits of using mobile money platforms such as M-Pesa when taking deposits include reduced costs, increased convenience and lower risk of fraud.
MFIs in Kenya are licensed and regulated by the Central Bank of Kenya (CBK) under the Microfinance Act of 2006 and the Microfinance Regulations for Deposit Taking MFIs of 2008.
Most MFIs in Kenya double up as deposit institutions. A deposit institution is one that accepts monetary deposits from its clients and earns interest on them.
You can learn more about how microfinance institutions work in the video below.
What Are The Products Of Microfinance?
- Microloans: They are also known as microcredit and are usually small in value. The loans are usually given to individuals as well as entrepreneurs who run micro-enterprises.
- Microsavings: These are accounts that allow people to store and save small amounts of money periodically without minimum balance requirements or other conventional banking requirements.
- Microinsurance: This is the packaging of insurance products to meet the needs of low-income earners for protection against risk and any other contingent events. Microinsurance is able to provide insurance with limited benefits and relatively low premiums.
How Can You Benefit From A Microfinance Institution?
- They provide much-needed access to funding: While conventional lending institutions such as banks do not extend lines of credit to people with little or no assets, MFIs are targeted towards ensuring that this group of people are able to access various forms of funding for various aspects of their lives.
- Reasonable repayment rates: Because of the nature of their business being centered in the core demographic of their clientele, MFIs have to have flexible repayment rates able to accommodate their borrowers.
- Encourage self-sufficiency and entrepreneurship: Most MFIs offer lines of credit towards micro-enterprises and entrepreneurs. The loans offers by MFIs are mostly geared towards helping businesses raise the much-needed capital to get their businesses off the ground.
Before you settle on a microfinance institution, you need to make sure you research on the…
- The size of the MFI: Especially if you are investing huge sums of money, you should use the rule of thumb that implies that you never invest more than 10% of the institution’s funds. This acts as a cushion for the future when your investment matures and you want to recover your investment.
- How long has the MFI been in business: Because this is your investment, you should pick an MFI that has been in business for a while and has experienced managers.
- How much you are investing: When handling an investment, it is best to diversify your risk. Do not give all of your money to an MFI. This is because of the risk that is generally associated with that investment being concentrated in just one area. It is best to be safe than sorry.
Microfinance institutions do offer many benefits especially to low income earners but that does not mean they are perfect. They have also been arguments that microfinance has not really empowered communities but made them more financially dependent.
Despite that, the microfinance industry has been a great asset to many people and as a financial services sector is definitely here to stay.
Do you trust microfinance institutions? And would you prefer them over banks? Please let us know in the comments section below.
Learn more:
