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close this bookSustainability of Micro-enterprise Credit Schemes in Kenya's Informal Sector (K-REP, 1993, 14 p.)
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View the document1. INTRODUCTION
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Kenya Rural Enterprise Programme

Occasional Paper no. 22


Paper submitted at a workshop on "Finance Mechanisms for sustainable development"
held at Dar-es-salaam on 22nd-26th March, 1993.


NGOs have traditionally been dismissed as ineffective providers of credit, they are generally regarded as being primarily concerned with social welfare objectives and overly reliant on foreign funding. This view of NGOs is changing in Kenya with the advent of NGOs like the Kenya Rural Enterprise Programme (K-REP) who are solely established to provide credit to microenterprises. The traditional welfare credit approach of NGOs is being replaced with commercial, sustainability focussed credit programmes, run by increasingly experienced and professional staff achieving high repayment rates (above 95%) and aiming towards self-reliance (severing the umbilical cord that binds them to donors) in the shorter or intermediate run. In the phraseology of Elizabeth Rhyne and Maria Otero "A Financial Systems Approach to Microenterprise" is being adopted and there is a significant 'take-off in micro enterprise credit and support following group based saving and credit models. The potential is great for significant contribution by NGO credit programmes to microenterprises development and to financial service provision for low-income entrepreneurs. This paper focusses on experience of the 'minimalist' group based savings and credit programmes designed and funded by the Kenya Rural Enterprise Programme.


The minimalist group-based approach is derived largely from the model created by the Grameen Bank of Bangladesh. In Kenya the minimalist approach has come to mean running of a credit programme as a business on its own, not integrated with other types of assistance to microenterprises. The approach aims to achieve profitability and to sustain running costs through positive interest rates and a large client base. Sustainability is achieved when the earnings from credit activities enables the programmes to meet running costs of the programme and its expansion in the short to intermediate run.

The impetus for the focus on sustainability has come from NGOs themselves, organizations that are increasingly professional and Kenyan-run and aware of the limitations of reliance on donor funding.

The emergence of the minimalist approach comes after a decade or more of NGO involvement with credit programmes in Kenya responding to the common assumption that access to credit is one of the primary constraints to the development of microenterprises in the informal sector.

In Kenya today there are 114 credit projects and programmes for micro and small scale enterprises, 96 of these are run by NGOs. Attempts by NGOs in the 70's and 80's in delivery of credit to low income entrepreneurs were notably unsuccessful in delivering credit in any volume or in achieving good repayments - certainly unsuccessful by comparison to the successful rural financial institutions in Asia and Latin America.

In 1990, K-REP led five NGOs in adapting the commercially oriented, group based saving and credit approach. Some twelve NGOs have since adopted the group based methodology though only six are fully 'minimalist' programmes, that is, are commercially oriented, pursuing the objective of institutional sustainability.

Of the 6 programmes, three (K-REP, PRIDE and KWFT) were specifically created as credit programmes for microenterprise while the other three (NCCK, Tototo and Chogoria) emerge from earlier welfare oriented projects building on existing experience of people focussed, participatory development of low-income people.

K-REP operates both as an umbrella organization and a funding intermediary, backed by USAID, Overseas Development Administration and Ford Foundation and as a implementing agency through its own Juhudi Credit Programme. Its objective is to strengthen the management of credit organizations and supporting other NGOs in this field to raise their outreach, productivity and performance. Established in 1984, K-REP has been involved in designing, implementing and assisting credit programmes for microenterprise development. K-REP's objective is also to reduce dependency on foreign donors and to raise the sustainability of NGOs in this field.

2.1 The K-REP 'Minimalist' Model

The essential feature of the K-REP minimalist model is a two tier group formation and group guarantees for the individual loans to other members. Members are drawn from the lowest class of active entrepreneurs with assets of less than KShs. 100,000 and employing less than 5 employees. Groups of five people (not related) self-select themselves to form a what are known as Watano groups. Six Watano groups constitute what we refer to as a KIWA (Kikundi Cha Wanabiashara) which has 30 entrepreneurs. Each KIWA meets once a week to transact, savings, loan disbursement; repayments, to discuss loan application and exchange information. A membership fee of KShs. 100 is levied and a further loan application fee of KShs. 100 is charged for every loan application. After 8 weeks of regular savings, 18 of the 30 members are entitled to a loan, and the remaining members receive their loans four weeks later. Loans are to individuals repayable weekly over 52 weeks at interest rates of 27% on declining balance. K-REP provide a maximum first loan of KShs. 10,000 going up to KShs. 15,000 with the second loan and KShs. 20,000 for a third loan. Loans in arrears for four consecutive installments are considered to have defaulted.

Each KIWA has to register as a social welfare group with the Ministry of Culture and Social Services and open a bank account in which they deposit their savings. Each KIWA selects its officers and draws up its constitution or set of rules, take minutes of weekly meetings and keeps a record of savings and repayment transactions as well as banking the loan repayments and savings. The group also undertakes loan appraisal assessing the merit of the loan on both character of the applicant and the business. Groups take collective responsibility. Attendance of meetings is compulsory with fines imposed for non-attendance and late attendance.

Savings mobilization is an integral part of the programme and compulsory saving of KShs.50 per week per member are collected at the weekly meetings. The savings are deposited in a bank where they stay as collateral, forfeitable in the event of default.

2.2 Key Features of the K-REP Minimalist Approach

1. It approaches credit as a business, above commercial rates of interest are charged and loan repayments are enforced through group pressure.

2. It focusses on provision of credit only.

3. Loans are to individuals but guaranteed by the other group members.

4. Group members take responsibility for group affairs, banking loan repayments and savings, ensuring repayment and correct behavior of other members.

5. Mandatory savings, with the savings funds acting as collateral.

6. Groups are structured, trained in the loan processing procedures and discipline. (We are noticing a tendency towards greater formalization, more written procedures, business plans, better record keeping, growing awareness of the legal status of documents.)

7. The target group for the credit schemes is the poorest level of entrepreneurs those with business assets of less than KShs. 100,000 and employing less than 5 employers. (They are effective at this level because of their techniques and promotion and member self-selection.)

8. Programmes are targeted to create sufficient number of groups to have a portfolio capable of sustaining branch costs. Each branch is targeted to have a client pool of 1800. Experience has shown that too rapid a recruitment of clients can lead to poor selection and training and subsequently to high defaults rates. Hence the programmes are now aware that expansion has to be on the basis of proper training in group self-selection, responsibility, the principle of group co-guarantee and discipline of group behavior.

9. The credit schemes are designed to be cost-effective with good internal organization, including high staff productivity and commitment, levels of efficiency to enhance self-sustainability. (Experiences have shown the need for a flexible, professional and decentralized management structure able to respond to local situations.)

10. Training of clients in basic business management is not the initial priority of the implementing agencies but it is recognized that the training in business management and practical skills is necessary for development of the enterprises they support.

11. The service provided by the credit schemes is in great demand, and therefore need very limited promotion beyond an initial phase that merely informs people of their existence and policies.

12. The initial size of loans is very small (KShs. 10,000). This, in addition to discouraging the participation of wealthier businesses, minimizes the scheme's risk.

13. Close and regular monitoring and evaluation of credit programmes' performance and portfolio quality.

3.1 Introduction

One word that is increasingly gaining currency in the development literature is the word "sustainability". The word may mean different things to different people but to people in the so-called third world countries (also called developing countries, underdeveloped countries and more recently countries of the South) that are involved in development programmes which depend on the largesse of foreign donors for survival it means being able to sever the umbilical cord that binds them to the donors.

For third world development organizations that depend on donor funds for both their existence and programme execution, "sustainability" means ability to continue involvement in development work, even after donor funds run out. To attain financial sustainability, sufficient revenues have to be generated from both programme activities and investments.

This is by no means easy to accomplish, particularly for institutions implementing social/welfare types of programmes with limited revenue base. Nevertheless, serious attempts are called for, given the ever changing donor climate whether influenced by politics or other factors. The current difficulties of acquiring donor funds and the bitter pills that come with the funds should jolt us towards giving sustainability more than just a casual glance.

Donors are increasingly paying greater attention to what happens after their grant ends, as many have been frustrated by the number of programmes which have "died" after funding is stopped. There is also unprecedented increase in demand for donor money, due to increased poverty in third world countries, and increase in disasters, man made and natural, as well as the number of agencies seeking donor financial support. Consequently, assistance is now directed to projects that not only yield the highest benefits to the people, but are also designed to become self-sustaining.

The purpose of this discussion is not to simplify an otherwise complex issue. It is widely recognized that certain development efforts (public goods) will always require subsidy. It would be foolhardy to suggest all development can become self-sustaining without considering the nature of the activities they undertake. The main focus of this short discussion is on "Sustainability for Micro-Enterprise Credit Schemes".

3.2 Planning for Self-Sustainability

Compared to many development programmes, credit schemes for micro-enterprise development have greater potential for becoming self sustaining, financially, and should not depend on donors funds except for expansion of the schemes and for financing those components of the programme that do not generate revenue.

Sustainability however, can only be achieved when a programme is well designed, planned and managed in a business like manner. NGOs are generally admired for their humanitarian predisposition which does not always come with good business management. The question is how NGOs can blend the good hearted nature they have, with the characteristics of successful business management.

The first step that needs to be considered, is internalizing the need for setting up self-sustaining schemes, making it part of the vision for the NGO. Many NGOs accept projects designed to become self-sustaining, simply because he donor says so and that's how to get funds. It is imperative that policy makers and chief executives believe in this goal before embarking on implementing credit schemes. Only then can good planning and management be effective. Secondly, there is the need for technically competent and committed staff.

Discussion on financial management principles and techniques needed for managing such schemes, is outside the scope of this paper. This discussion will center on a few simple techniques that can be instituted as a means of establishing a sound base for tracking progress towards self-sustainability.

3.2.1 Establishing Cost Centres

Where an organization is involved in various activities, whether related to credit or not, it is important to separate the functions and financial management of these activities. This can be done by establishing cost centers and determining which of the programme components are expected over time to generate revenues sufficient to cover related operating costs (profit centres).

3.2.2 Cost Classification

For each profit centre, costs may be classified under three main categories; Direct Costs, Operations Overhead, and Institution Overhead, as a basis for tracking the levels of cost coverage.

(a) Direct Costs include:

Direct labor


Salaries of staff that are directly involved in the production of goods/services (in this case salaries of credit officers).

Direct Material


Technically, direct materials refer to those raw materials that can be traced in the finished product. In the case service industries such as credit, there are no direct materials.

Direct Expenses


All expenses that are directly related to the production process. In this case expenses such as, passbooks, rent of credit office (not supervisor and managers offices), transport for delivering and collecting money, and all expenses associated with giving of credit.

These first three categories constitute what it known as Prime Costs and is the first level that NGO credit scheme should attempt to cover from credit operations revenues. In the K-REP sustainability plan, Prime Costs are to be covered in the first year of credit operation of the programmes. K-REP supported programmes were able to achieve this level of sustainability within 8 to 12 months of operation.

(b) Operations Overhead

The second category of costs, Operations overhead, is a group of operations expenses related to supervising and administering credit operations. These include salaries and fringe benefits paid to supervisors of credit officers, e.g. Branch Managers, Project Accountants, Secretaries, Messengers, cost of money, transport costs, electricity, telephone, postage plus any miscellaneous expenses associated with the credit operations including tea for staff if such is provided.

Once revenues reach a level where both prime and operations overhead are covered, a significant achievement will have been made. For if this level can be sustained, then at least the branch lending activities can continue without further donor input. This is level two of the sustainability ladder. Two K-REP funded programmes (Juhudi Eldoret and PCEA Chogoria) appear well on the path of meeting this planned target of sustainability within three years as per the plan. The other programmes will take longer to achieve this because of defaults that have undermined their achievement of sustainability within the planned period.

(c) Institution Overhead

Level Three of the sustainability ladder includes covering of institution overhead. This include the cost of managing the institution, developing programmes, and other establishment costs that cannot be allocated to the first two levels. Where an organization has many programmes, this cost is apportioned to all programmes. The problem is that many of these "other" programmes are usually non income generating, and so apportioning costs tot them serves no purpose. For credit operations revenues to cover some portion of institution overhead, is itself a great achievement. However, this is easier said than done. Moreover it is only a portion of institution overhead that can be covered, unless the credit programme is significantly large. To cover institutional overheads NGOs can resort to other non programme financial investments.

Level Four of the sustainability ladder include covering the institutional overhead as well as meeting training, Research and other developmental costs.

3.3 Sustainability Ladder

There are a number of steps on the road to sustainability, to which the sustainability ladder below is a broad guide.

Level IV - profitable banking operation, recovery of Headquarters, training, expansion research costs, independent of donors.

Level III - Complete Branch Sustainability. Over 100% recovery of branch costs; staff training costs covered, contribution to headquarter costs.

Level II - Financial systems Approach employed. All Prime costs and the branch overhead costs covered. Large outreach.

Level I - All prime costs covered by revenues. Low outreach. Financial Systems approach not internalized.

The institutional internalization of the financial system approach is the first stage toward sustainability. Level II leads towards an operationally effective and commercially based approach. The minimalist school is a financial systems approach (level II and above). The hardest transition is from level I to level II which involves a major restructuring of management, management systems and implementing capacity. K-REP supported minimalist programmes have all passed level I (recovering over 50% of branch costs) this is being greatly assisted by substantial investment income from loans and grants from K-REP which will diminish over time but will only be replenished if the programmes are effective in their operational management and their portfolio quality. Long term sustainability means total operational profitability and the generation of loan funds which must rely on the savings base of the programme. It is worth noting that the Grameen Bank is still subsidy dependent for expansion and training costs.

3.4 Role of monitoring and evaluation

Monthly monitoring of various indicators of performance is key to the success of credit programmes designed to be sustainable. K-REP collects monthly data on the following indicators of performance.

- Number of clients (disaggragated by gender)
- Number of loans disbursed
- Amount disbursed
- Amount due - principal and interest
- Amount due and paid - principal and interest
- Amount pre-paid - principal and interest
- Amount in arrears - principal and interest
- Number of loans in default
- Amount in default
- Repayment rate (quantitative and qualitative)
- Amount of outstanding loans
- Number of repeat loans
- Total branch operation costs
- Cost per loan
- Cost per Sh. 1 lent
- Total income realized (interest + fees)
- Sustainability index
- Total amount saved
- Savings forfeited
- Savings to outstanding loans ratio.

The monitoring data is analysed monthly and a report made to all concerned parties. This effort is complimented by internal evaluations which are done every two years and external evaluations every four years. In addition our operation research section undertakes in-depth study of various aspects of the programmes particularly on areas that undermine the sustainability of the scheme. For example, recently an in-depth study was undertaken on the defaulter problem while one is planned on membership turnover.


While sustainability has become the objective of the minimalist programmes, the path to sustainability is far from straightforward both in terms of short term and long term sustainability. The difficulties experienced by all K-REP funded credit schemes in the initial stages reveal the complexity of issues involved in adopting a financial systems approach, which represents a significant departure in thinking from welfare approach.

In the initial stages, inexperience, lack of sufficient orientation and training on group responsibility, too rapid expansion of groups all contributed to substantial pockets of defaults, in all programmes. Several groups disintegrated after loans had been made. Staff often lacked any experience of micro enterprise promotion.

The programmes have since learned from their mistakes and have evolved more appropriate methods and systems, improved their induction training in group responsibility and gained on the job experience. We can now say with some measure of optimism, that the seeds of a solid micro enterprise credit programme have been laid, measured by the level of outreach, by early indicators of social and economic impact of groups and their individual enterprises, programme performance indicators such as repayment rates and cost-effectiveness and by the fact that all the programmes are steadily moving up the sustainability ladder albeit, only two programmes will achieve sustainability Level II within the three years stipulated. It is indicative that other small credit programmes, such as Undugu society of Kenya, Food for the Hungry and Action AID are now abandoning earlier individual credit programmes and turning to group based methodology though sustainability is not a goal for them at the moment.

4.1 Short Term Sustainability

Short term sustainability includes not only the income generated from interest and fees but control of expenditure and staff productivity. In some programmes the concept of branch office cost control is entering into the equation for the very first time. Programmes such as NCCK have not delegated authority for branch costs to the branches but concentrate them at head office with the result that the concept of branch level cost recovery is entirely absent. Until branches can monitor and influence both expenditure and staff productivity, branches will not move towards sustainability criteria.

The two principle measures of cost-effectiveness are cost per loan disbursed and cost per shilling lent. Juhudi-Kibera is currently covering 80% of branch costs, PCEA Chogoria 95% and PRIDE's Baringo programme 60% of branch costs. Overall the 6 K-REP reporting programmes the average is 60% which indicates the much lower awareness of the issue in some programmes and also high start-up costs for new programmes. Cost per loan average KShs. 2,045 across all programmes, ranging from KShs. 3,509 for NCCK programme in Kisumu to only KShs. 1,320 for Juhudi's Kibera programme though this measure is sensitive to the loan size. These technical measurements are important in assessing the degree to which the management is sensitive to sustainability. The cost of disbursing a Sh. 1 worth of loan ranges for KShs. 0.10 (Juhudi Kibera) to KShs. 0.30 (NCCK).

4.2 intermediate to long term Sustainability

The lack of ability of the minimalist programmes to use the savings base to on lend to their clients, means that the programmes will remain dependent on donor funds for lending capital for any expansion and that local funds are not being effectively utilized within the local community. While the authorities have turned a blind eye to the deposit taking of group-based credit, these deposits remain within the banks and the programmes cannot get access to these (except where savings are surrendered against bad debt). Legislative arrangements are required to permit banks and NGOs to work out a system which safeguards depositors rights but allows some degree of on-lending of deposits. There seems to be an indirect transfer of financial resources from the informal to the formal sector through this savings mobilization strategy. For example, all the savings amounting to KShs. 14.9 million mobilized from members by the schemes are deposited with various formal financial institutions. The whole amount was never used to lend to the informal businesses by the NGOs.

Secondly intermediate to long term sustainability requires the building of a strong base of creditors/clients whose enterprises are growing, markets are expanding and diversification and employment generation taking place. The contention is that programmes designed to assist enterprise development will only be successful if enterprises are growing, reinvesting and innovating. This has been described as transformation lending, seeking to graduate larger micro enterprises from the micro sector by providing services to support the transformation of micro enterprises into small businesses.


In Kenya a financial systems approach is beginning to emerge with a group of effective implementing agencies to provide a framework for microenterprise credit based on increasingly successful group methodology. The programmes are beginning to operate not as isolated, donor-dependent projects but as part of the development of the financial system itself, commencing on the road to performing as viable financial intermediaries. The NGO programmes have begun to climb their way up the sustainability ladder at least towards short term sustainability though as yet run with external sources of funds.

Short term sustainability is being achieved through a commercial orientation, regular monitoring and evaluation of the various factors of performance costs and return on investment, internal efficiency and good performance of groups based on reliance and trust in them. Long term sustainability, that is the build up of domestically generated loan capital and the covering of total programme costs including training, is still in the distant horizon given that these NGOs are not able to perform the task of financial intermediation and to relent savings generated. Government legislative assistance is required to permit an arrangement to be worked out between the banks and NGOs which safeguards depositors savings and establishes a capital adequacy ratio and proper supervision, while also permitting the on-lending of funds.

One of the factors which has contributed to the take off of successful financial programmes for low-income entrepreneurs is the maturity, professionalism and competence of the Kenyans responsible for running these programmes, aware of Kenyan "ownership' of the programme and destiny. Self-reliance is being built on solid implementing capacity derived from modern management and management information systems.

Whilst independence from donor support is rightly aspired to, donor assistance will still be required for developmental activities, for building of implementing capacity and for research and experimentation with new models and systems. Self-reliance needs to be built on solid implementing capacity. It would be in the interest of the whole programme to ensure that the management changes, and standards of professionalism and modern record systems are applied.

Programmes focussed on finance for enterprise cannot ignore the expansion and development needs of their clients, the impact of loans and the development of entrepreneurship. The development of entrepreneurship and leadership in product development, market expansion and diversification is crucial in the long term if this sector is to perform the dynamic role in employment creation and economic expansion hoped for. Kenya is believed to have 350,000 micro and small scale entrepreneurs who form the base of the entrepreneur society. A proportion of that group require selection for training, skilling and grooming to initiate diversification, to introduce new technology and to embrace new markets. NGOs need to be involved in the graduation process, enabling its clients to obtain bank loans and opening up more dialogue with banks for enterprising clients with the assistance or credit referencing. NGOs could also perform a valuable role in organizing and networking a variety of training programmes, both practical and managerial, and disseminating information on different technologies and markets. The findings have shown that these services neither have to be provided for free nor necessarily provided by the programmes themselves. The greatest need is for information on what is available for its clients and some assistance in giving their clients access to that training and opportunities.

There is a role for better networking between NGOs involved in micro enterprise development not only nationally but Africa-wide. A recent USAID funded workshop that brought together practitioners from a number of Micro enterprise credit programmes in Africa who have distinguished themselves for their high level of performance established what was dubbed the "African Best Practises Association" that would co-ordinate and facilitate sharing of information on systems and methods of running credit schemes for micro enterprises efficiently. In Kenya a networking organization, the Small Enterprise Credit Association has been established. It is hoped that it will among other activities, lobby on behalf of the micro enterprise sector viz a viz the government, taking up such issues as amendment to the Banking Act which prohibits deposit taking and the establishment of some form of supervisory function so that these programmes can more fully perform a banking function.


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