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Access to affordable finance through member-based financial institutions

Member-based financial institutions

  • Emma Kimani
  • Oct. 15, 2020


Financial Services Associations (FSAs) are rural membership-based financial institutions offering credit, savings, and money transaction services to their members. The basic FSA model is similar in many respects to other types of decentralized financial institutions, such as savings and credit co-operatives, with local ownership of the money contributed and a strong emphasis on user-owner governance and management. FSAs have grown and become naturally complex and outgrown the ‘self-help group’ notion. The larger FSAs are intermediating between members without strong relationships. The implicit, partial depersonalization of intermediation needs to be reflected in a more formal structure.

Village Bank

In Kenya, the FSAs have been principally promoted by K-Rep Development Agency (KDA), an NGO with donor support since 1997. There are now about 100 operating FSAs in various parts of the country. KDA’s primary objective in establishing the FSA model in Kenya was to significantly push forward the frontier of sustainable financial service provision in more remote geographical areas where mainstream Micro-Finance Institutions (MFIs) and commercial banks were not operating. Financial service providers operating on a conventional, formal and centralized organizational model were  unable to offer services on a sustainable basis in areas characterized by low population densities, high incidences of poverty, and poor infrastructure. Before the introduction of mobile banking and agency banking, these factors resulted in a very significant proportion of the population remaining beyond the formal financial access frontier. In contrast to the few service providers (typically MFIs) working in these remote marginalized areas, FSAs have been able to provide a much broader range of financial services to their members.

K-Rep Fedha Services Limited (KFS), registered under the Companies Act as a Limited Liability Company (LLC), was established by KDA in 2005 as a specialist FSA Management Company to provide management services and oversight to the FSAs. The aim was to create a cost-effective approach to delivery of support and oversight services to FSAs in order to assure sustainability of individual FSAs and KFS itself. Underpinning the approach was the premise that a commercial environment would produce greater incentives for efficiency in service delivery at the level of the support organization. KFS was created as a solution to capacity weaknesses in small decentralized financial intermediaries, without simultaneously losing the benefits of member ownership and the low operating cost structure.

The KFS-FSA model and its uniqueness

Village Bank customer

To ensure FSAs are managed by employing best practices, KFS employs and deploys managers to the FSAs who are charged with the day-to-day management of the FSA operations. Management capacity is spread across the network, with KFS head office providing technical backstopping. Currently, KFS is managing 36 FSAs spread in Kitui, Makueni, Bomet, Western and Lower Coast regions.

FSA staff have limited technical competence and skills and largely rely on technical backstopping from KFS. Moreover, the boards lack the prerequisite capacity to oversee the management. As already noted, the management competence required for running FSAs is embedded and collectively provided by KFS through a management services arrangement.  This is necessary for the FSAs to be sustainable for the foreseeable future.

Unlike Savings and Credit Cooperatives (SACCOs), FSAs have a clear distinction between voluntary savings and shares (which are non-refundable but can be transferred to other members). Lending is tied to shareholding and so are the dividends paid to members. This has encouraged capital build-up for the relatively young FSAs. Under this model, ownership remains with the individual FSAs with a local Board of Directors providing the benefit of local knowledge. Most staff also are employed locally. However the management is provided by KFS exploiting the economies of scale and risk management benefits from the use of unified, tested business processes and information systems. This significantly lowers the costs of providing reliable, relevant information necessary for both day-to-day operational management and strategic oversight. In addition to providing oversight, KFS has also been involved in:

  • Business development: Market research and new product development as well as refining the existing ones based on the member’s needs, marketing and promotion of the FSAs and branding. The products so far developed for the shareholders are hereby attached as annex 1.
  • Operations management: Through the FSA manager, day to day running/business management of the FSAs business activities like credit, savings, money transfer and others. Use of best credit practices is employed to safeguard the shareholders’ funds and return on investments.
  • Management Information System: KFS provides the FSAs with the appropriate MIS which includes initial infrastructure/ equipment and software. The MIS support is provided by KFS as a service with the MIS support team centrally located. This has enabled the FSA to exploit economics of scale to acquire and maintain the MIS which would otherwise not have been possible individually.
  • Guidance in development of policies and standardization of operations across the FSA network: This has ensured that the FSAs are managed using the best practices. Through standardization all FSAs receive similar service attention at all times.
  • Capacity building: Organizes need-based training for shareholders, Board of Directors, and FSA staff.
  • Financial management: This includes liquidity management, asset management, liability management documentation and generation of reliable financial reports for the purposes of decision by the FSA Board of Directors.
  • Strategic and business planning: The KFS head office planning team equips the FSA manager and staff with appropriate planning skills and the FSA boards approves the plans.
  • Human Resource management: In conjunction with the Board of Directors, KFS ensures staff with the right skills, competencies and attitude are hired, and interviews are conducted jointly. The Board of Directors is responsible for remuneration of the FSA staff while the responsibility of remunerating the FSA manager/CEO lies with KFS.
  • Risk management: KFS consistently reviews the FSA system through process mapping to align them with the best risk management practices. By ensuring the FSAs embrace and employ the best risk management practices, shareholders’ funds are been safeguarded. 

KFS’s technical backstopping to the FSAs model realizes results in a range of operating environments, placing high priority on using innovative solutions and ensuring delivery of fairly priced financial services to large numbers of poor and low-income communities in rural Kenya.

Partnership between KFS and Better Globe Forestry

Village Bank customer

The partnership and collaboration between KFS and Better Globe Forestry was initiated in late 2012 since the two institutions had operations running in Kitui County. A gap existed between the need to affordable finance by the farmers Better Globe Forestry was working with, and its provision, a key enabler to poverty alleviation. This was because no financial institution had operations in Mwingi Sub-county of Kitui County, since the area was classified as a place where financial institutions would not make any business sense. The area being semi-arid was and still is characterized by high incidences of poverty and high dependency on government aid, especially provision of relief food. Owing to the nature of the area and its exclusion, very few people engaged in income generating activities. A close relationship exists between the income generating activities people engage in, and access to affordable finance, and this exactly describes what was happening in that region.

Better Globe Forestry approached KFS due to its knowledge and experience in establishing and managing rural based financial institutions in the County. This partnership seemed a surefire from its inception, since tree growing will improve climatic conditions and enable the communities, while it was in in line with both KFS’s and the FSA’s mission of improving the livelihoods of the local people. The collaboration and partnership enables small-scale farmers to access finance for purposes of planting not only trees but also other crops, with best practice and training, as well as the introduction of the mentality of farming as a sustainable business to the community members. This will not only improve their livelihoods but also the climate.

To get started, Better Globe Forestry funded KFS to undertake a feasibility study to ensure the locations for the FSAs would be appropriate. The general areas had been identified by Better Globe Forestry for establishing and managing tree nurseries and grow Melia volkensii (mukau) with farmers. The first FSA was set up at Nguni, and the second one in Kamuwongo, both in Kitui County. Better Globe Forestry funded the establishment and operationalization of both to the tune of Kshs 11.3m as at the end of 2019. The operationalization of the Kamuwongo FSA project is still active and will run till the end of 2020. Nguni FSA opened its doors on March 2, 2013 with 403 members, and the Kamuwongo FSA in December 2017, with 800 shareholders. Members can access finance for acquisition of small quality assets at cheap rates thanks to the economies of scale of KFS’s operations mentioned above. The objectives for both KFS and Better Globe Forestry have been met to a large extent.

However, with the appearance of digital lending, the phenomenon of over-indebtedness in the rural areas is slowly creeping in. This has to be mitigated by investment on financial literacy to the FSA members; in other words, training and sensitization. In the last 2 years KFS has fully embraced its customer-centricity model and as such made the strategic move to invest in training its staff to ensure that all FSA members’ needs are well mapped and lending is based on real needs. This has curtailed growth in lending but has had positive impact on members’ functional and emotional needs. As at the end of May 2020, both FSAs were serving a total number of 6,426 households, with Nguni at 4,335 and Kamuwongo at 2,091.

FSAs progress since inception

Nguni FSA

Year 2012 2013 2014 2015 2016 2017 2018 2019 Total
Number of new members 67 828 981 655 666 460 202 212 4,071
Loans disbursed (Ksh) 0 2.6m 13.5m 17.3m 41.4m 66.1m 31.6m 38.8m 234.7m
Average loans size (Ksh)   8,369 9,818 8,269 8,277 8,723 10,629 13,422 9,381
Share capital mobilized (Ksh) 24,300 810,700 1.86m 2.1m 2m 1.8m 2.3m 2.1m 13m

Kamuwongo FSA

Year 2012 2013 2014 2015 2016 2017 2018 2019 Total
Number of Members             1,462 541 2,003
Loans disbursed (Ksh)             3.78m 13.9m 17.68m
Average loans size (Ksh)             8,363 8,128 8,177

FSA products on offer (summary)

Brand name Objectives Some details
Maendeleo loan (the loan that enhances your social life) Household goods, food, farming seeds, water tanks, phones, house construction etc. e.g. 140,000Ksh at 18% interest p.a., 36 months
Biashara loan Working capital for small businesses (shops, hotels, hawkers, Mpesa agents etc.) First loan 1,200-20,000Ksh, later up to 200,000 and above
Masomo loan Children’s education at all levels Preprimary (11,035Ksh)
Primary (13,085Ksh)
Secondary (61,795Ksh)
College (107,390Ksh)
Emergency loan Accidents, deaths, sicknesses Maximum 10,000 Ksh
Pay-back period 5 months
Soko loan Business clients trading on markets Maximum: 5% of the net savings of the member
Overdraft & advances Enable entrepreneurs to take advantage of business opportunities, address short-term social needs of farmers Business people in fast moving goods (eg. meat, beer during festive seasons), suppliers of firewood, charcoal, water, vegetables etc.
Asset financing Acquiring durable assets (water pumps, donkeys, ploughs & bulls, welding equipment etc.) First loan max 20,000Ksh up to 200,000Ksh

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