Microfinance Enhancing Livelihoods Through Innovation


By remaining true to its social mission of poverty alleviation, the microfinance industry has played a critical role in deepening Kenya’s financial sector. It has penetrated and served the mass market mainly through filling the gaps created by the failure of mainstream banks to develop financial products for clientele in the base of the pyramid. The amendment of the Microfinance Act in 2013 has been an upshot for the industry. Microfinance Institutions are now allowed to convert into banks and can now operate current accounts, trade in foreign exchange and issue cheques just like commercial banks. This has gone a long way in facilitating the development of innovative and fairly priced products to the benefits of customers and MFIs alike.


The potential of the microfinance industry in deepening our financial sector cannot be overlooked in Kenya. It has grown over the years to play a major role in alleviating poverty among the economically disadvantaged populace, improving livelihoods along the way. Its contribution to the country’s social and economic growth and development is huge. Thus, the Economic pillar in Kenya’s Vision 2030 identified financial services as a major driver to enhance growth in gross domestic product (GDP). Microfinance institutions (MFIs) have been cited as a pivotal player in this sector.

“A few years back, most people were totally excluded from the financial sector. MFIs were therefore established to extend banking services to these people in the base of the pyramid and support them financially,” says Benjamin Nkungi, chief executive officer, Association of Microfinance Institutions in Kenya (AMFI-K).

The sector has significantly spurred development in rural areas and improved people’s standard of living. To achieve that, it has developed a range of innovative financial products that are customized to the needs of the common mwananchi in agriculture, education, business, health care, water and sanitation.

According to Nkungi, MFIs are leveraging on information technology platforms to penetrate the low-end market and serve the unbanked. For instance, the use of mobile money as well as internet banking is now the norm. It has reduced the cost of transactions and made credit affordable.

Generally, these institutions nurture clients from scratch by giving them the necessary non-financial and financial support. This means that in addition to credit, they provide customers with basic education on finance, leadership, management and marketing among others. As such, they are more informed when accessing credit and use it productively.

“We have grown our clientele base. Today, we have over 6 million Kenyans accessing financial services through the MFIs,” the CEO avers.

Since its inception, AMFI-K has continued to play a key role in the development of the microfinance industry. It has an objective of promoting a conducive environment for the development of MFIs. Its membership ranges from micro-finance banks, commercial banks which focus on micro-lending, credit only lenders, wholesale micro finance lenders, developmental institutions, and insurance companies (micro-insurance) to Saccos. To date, it has 60 members and continues to recruit for more because there are a handful of MFIs in the country.


Industry regulation

AMFI-K has achieved a major milestone through lobbying for a better regulation of the sector. “We have influenced the government to enact and amend laws to meet the industry needs,” observes Nkungi. The enactment of the Microfinance Act by the Parliament in 2008 was intended to bring the industry under a legal, regulatory and supervisory framework so that it could become a pivotal part of the formal financial sector.

“We enacted the Microfinance Act of 2006 and pushed for further amendments in 2013 where deposit taking MFIs were allowed to convert to microfinance banks where they take deposits, trade foreign exchange and operate current accounts just like commercial banks,” offers Nkungi. As such, the microfinance banks are now regulated by the Central Bank of Kenya and operate across the country.

Currently, AMFI-K is developing a regulation to oversee the conduct of credit only MFIs so that they operate in a professional way and stem away quacks. “We are doing this to protect investors and borrowers. These players have to operate in a regulated way so that we can predict their behaviours and and encourage professionalism.”

In general, the Association is working with the government to promote people’s confidence in the financial sector to be safe and sustainable, despite the few cases we have seen in the recent past where banks have been place under receivership and other shut down. Nkungi expresses his confidence that the sector is resilient to such cases due to their models and that of trust.

Capacity building

Besides regulation, AMFI-K also provides training to its members on service delivery, product development, customer care and governance. This is aimed at building their capacity so that they can effectively deliver services. According to Nkungi, AMFI-K conducts survey to identify customer needs. This is followed by product development training to ensure that institutions develop products that are customized to customer needs.

Moreover, the Association has created an environment for knowledge exchange and management, where members can benchmark with others for best practices, both locally and internationally.

It is worth noting that many investors have taken interest in the industry. “In order to enhance that, newtork on behalf of our members and link them with support institutions.”

Challenges facing the industry

One of the major challenges is lack of affordable funds. “Credit from commercial banks is very expensive. Besides, afforadble funds that were previously available from social investors have become limited since the demand is very high,” says Nkungi. The CEO believes that the government can help in building a strong microfinance industry by coming up with solid funding interventions. For instance, by creating a small and medium enterprise (SME) fund that can be accessed by MFIs at friendly terms.

Over-borrowing is also prevalent, leading to serial defaulting and business failure. Mainstream banks have been affected by bad loan books. Nkungi however shares his optimism that non-performing loans in the microfinance sector is less than 5 percent. This is attributed to the size of loans, types of businesses financed, the lending model and client engagement.

Furthermore, as one of the founding members of credit information sharing (CIS), AMFI encourages all microfinance institutions to share both positive and negative information to the credit bureaus. It has been pivotal in understanding the credit worthiness of borrowers and help curb further losses due to serial defaulting. Nevertheless, there is concern that CBK mandates only regulated institutions to share information to CRBs which underscores CIS efforts.

Future of MFIs

“The future of the industry is promising as MFIs will continue to play the role of poverty alleviation not only in Kenya, but in the region at large,” projects Nkungi. So far, a number of MFIs have gone regional.

AMFI is a member of the East Africa Microfinance Network. In 2015, the first ever East Africa Microfinance Summit was held in Kenya. Its aim was to promote best practices in the field, stimulate knowledge exchange and work towards empowering livelihoods.