BizCLIR

Access to finance is the catalyst that allows an economy to effectively and efficiently allocate resources. Individuals need finance to fund housing, education, and healthcare that will raise their standards of living and improve their productivity. Farmers need access to finance to invest in infrastructure, fund agricultural inputs, and bridge their incomes between harvest and sale. Manufacturers and service firms require finance to expand production and enhance productivity. Entrepreneurs require finance to fund new ventures that spur innovation and competition. Financial firms, meanwhile, act as a mechanism to distribute resources to their most effective use.

Kenya, like much of the developing world, requires significant, yet achievable, reforms to transform its financial system into the efficient resource allocation engine that it should be. Once these reforms take place, Kenya should expect to see increases in domestic and foreign investment, more firm start-ups, increases in employment, and greater GDP growth.

In many ways, the recent history of access to finance in Kenya represents a good news story. Private financial institutions are growing, competing, innovating, and expanding into areas previously viewed as “unbankable.” Though access to financial services, especially in rural areas, remains still too limited, the recent expansion is encouraging. Foreign banks continue to enter the Kenya market. Kenyan microfinance institutions have developed into, and been licensed as, commercial banks. Over 5,000 Savings and Credit Cooperatives (SACCOs) continue to provide financial services, specifically in the rural areas, and are flourishing. The regulatory oversight of both microfinance institutions (MFIs) and SACCOs is being strengthened. Non-banks are even wading into the financial waters with innovative products that are providing improved services oriented to the needs of the average Kenyan. Notwithstanding these advances, one could still argue that the success in the financial sector has occurred in spite of the business enabling environment, rather than as a result of it.         

Typical loan transactions for any financial institution incorporate a few basic steps. First, the lender must have the ability to assess the risk of lending to a given borrower. Once it has agreed, based on this information, to extend the credit, the lender next must be able to secure the debt by registering a lien on a given piece of collateral. After the lender disburses the funds, if the borrower defaults, the lender must be able to take possession of the collateral under the authority of an effective commercial court system.

In Kenya, the institutions that should buttress such a system are insufficient for a growing economy. First, credit information remains weak. New licensing standards for private bureaus represent a positive step toward setting standards. However, the system does not require financial institutions to supply positiveinformation – that is, information evidencing a creditor’s successful meeting of past loan terms and other evidence of good credit behavior. In addition, the bureaus can not collect and disseminate non-financial data, such as utility payments. Furthermore, Kenyan laws prohibit the sharing of data across different types of financial institutions (i.e. banks, MFIs and SACCOs). The weaknesses in the system result in additional costs for banks conducting their own due diligence or, in most circumstances, an unwillingness to lend to potentially credit-worthy borrowers. 

Second, although the laws support collateralized lending, the institutions, in effect, do not. The registries where creditors should be able to register a security interest in property (land, chattel, motor vehicle, or securities) are paper-based systems which are time-consuming to search and to use. These cumbersome processes embed extra time and cost into formal lending. 

Finally, Kenya’s commercial courts are not an efficient and transparent arbiter of disputes relating to finance. The courts are backlogged, with approximately one million unresolved cases. When banks do not have confidence that they can efficiently collect on defaulted loans, they are less likely to take risks that could lead to default. When instances of default do end up in Kenya’s courts, the cases are not resolved in a timely manner. Thus, the funds at issue cannot be repurposed to more efficient locations in the economy.

This chapter focuses on these and other constraints to and opportunities for accessing finance in Kenya. Recommendations are put forth at the end of the chapter suggesting approaches to lower transaction costs per loan and expand finance. The BizCLIR scores show that, while supporting institutions are increasingly healthy, the other areas of inquiry – legal framework, implementing institutions, and social dynamics – need continued emphasis on reform.