|Sustainability of Micro-enterprise Credit Schemes in Kenya's Informal Sector (K-REP, 1993, 14 p.)|
|2. THE K-REP MINIMALIST GROUP-BASED CREDIT AND SAVINGS PROGRAMMES|
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.
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.
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.