Microfinance Braces for Hard Times in Post election Violence

Published on 15th February 2008

The microfinance sector in Kenya has recorded notable gains in the last two decades. The 1990s saw the sector transform from an insignificant player in the national psyche to a recognized sector with potential to equitably offer financial services to the active poor in viable micro-enterprises, empower enterprising women through financial access and skills and drastically reduce poverty. 


In the last 5 years, the sector has consolidated the gains of the 90s. The microfinance Act, a legislation envisaged to drive the sector to the next level of growth and development was debated in parliament and enacted. The Youth Enterprise Fund and Women Enterprise Fund were also established.


The sector may be a severe casualty of the post-election violence since its market has largely been the unbanked residing in the informal settlements of Nairobi, Eldoret, Kisumu, Nakuru, Naivasha and rural areas. Unfortunately, these areas have been adversely affected by the post election violence.


The post-election violence in Kenya brings with it operational and financial risks and challenges hitherto unknown in the Kenya microfinance landscape. There is increased security risk to the microfinance staff, clients and their assets. While the income generating asset of the micro finance institutions (MFIs) has been awfully exposed, the human resource component is equally affected. It will be difficult for example, for some MFI staff to work in certain localities for fear of reprisal, real or imagined.  Change of staff can mean a loan being repaid or defaulted.


The microfinance financial delivery is founded on group guarantee and peer pressure. Group lending and co-guarantee mechanism effectively makes one’s neighbor (business or house) a co-signer to loans. This drastically reduces problems created by information asymmetries between the institution and the borrower. The mechanism bars risky borrowers from participating thereby ensuring high loan repayment standards in the absence of tangible security.


Microfinance success is hinged on mutual trust. The clients self select themselves based on trust, and thereby co-guarantee each other in order to short circuit the collateral requirements. The microfinance institution trusts that the group will ensure the success of the co-guarantee mechanism by weaning out undesirable members and ensure peer pressure is upheld. With this the MFI entrusts the individual entrepreneur with funds usually with no collateral. Once the cycle of trust is broken down, the institution struggles to recover lent out funds and meet operational and financial costs. In Kenya’s post election violence situation, loan repayment is left at the mercy of individual clients, escalating the costs of lending and derailing future institutional and geographical expansion plans.


The post-election violence has deflated these mechanisms as neighbor turns against neighbor and a group member against another. Solidarity groups have disintegrated and trust eroded.  While refinancing and rescheduling some loans would partially help, it is the tenacity and innovation that MFI managers bring on board that will determine the pace and level of institutional recovery and eventual progress.


Another probable occurrence may arise when the violence gets a life of its own and takes longer to quell than previously anticipated: the desire for humanitarian agencies to address the short term needs of the internally displaced persons (IDPs) and returnees. The transition period between relief and development brings with it an invasion of short term oriented micro-credit programs to manage the intricacies of conflict through entrepreneurship and economic empowerment. Although intervention is noble (clients require some “push” to get out of this quagmire), some coordinated approach by all players is a prerequisite to the eventual operation of microfinance activities in the affected areas, otherwise all the gains made maybe watered down.


The microfinance sector must however rise out of the ashes to meet its popular mandate - reducing poverty and providing innovative financial services for enterprise creation. It should develop strategies to get back into the affected regions as a catalyst to spur individual and community economic reconstruction. It should also ensure relative security for the staff, put institutional infrastructure in place, guarantee accessibility to clients, review financial products and delivery methodologies and set modest objectives. It’s only then that scale-up strategies could be adopted.


The sector requires leadership, management acumen, vision, skills and support. It definitely will not be easy, but it is time microfinance institutions and practitioners live to  their mission and vision statements.


The potential of microfinance in restoring hope and eventual healing cannot be wished away, unless Kenyans live in denial. Doyle (1998) in the book Microfinance in the Wake of Conflict asserts that microfinance is a tool that can serve multiple goals. It  is not only a tool for rebuilding and restarting local economies by providing needed financial services for enterprise creation but also an instrument of relief, survival in the wake of disaster, peace and reconciliation. Is the sector able to rise to the challenge? Time will tell.




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