Credit firms use social link to help poor access loans

Lending to the low income groups is always a brave bet as their chances of servicing the loans is never guaranteed.

But a credit firm has found a way to help low income earners guarantee one another when applying for loans— turning out to be one of the safest ways of ensuring that loan is repaid.

Women Enterprise Solutions (WESO), a credit company, uses the concept of social solidarity, made famous by Nobel laureate Muhammad Yunus of Grameen Bank— to help poor people access credit.

“We have two groups that we focus on: poor and very poor women. They have no substantial collateral,” said Mrs Juster Weru, CEO of WESO.

Other institutions offering credit to organised groups include the Kenya Women Finance Trust, a microfinance firm that also focuses on women.

Mrs Weru says that the women are asked to form groups of five or more.

An individual seeking a loan saves within the group for six weeks after which she can access up to six times the value of her savings.

Most of the loans advanced are for business, though personal needs like school fees may also be financed.

The groups are self-monitoring and members countersign loan forms with a loanee, guaranteeing to pay in case the loanee defaults.

WESO lends as little as Sh2,000 to individuals that fall under the very poor category.

If a member develops a good credit history by consistently taking and paying back loans, she can be eligible for loans of up to Sh300,000 which is not backed by a group but by assets she will have acquired in her expanding business.

The loans attract an interest rate of 18 per cent.

This is about three per cent higher than the average lending rates by commercial banks which as of August stood at 14.76, according to Central Bank of Kenya statistics.

“Unlike commercial banks that are able to obtain money at lower costs through customer deposits, we source part of our capital from the same banks who lend to us at higher interest rates,” said Mrs Weru, adding that the high cost of capital for small lenders is what causes their relatively high interest rates.

Despite the lower interest rates offered by banks, most small businesses and individuals, barred by lack of collateral or healthy cash flow statements, still access credit through informal groups like shylocks or employers.

According to FinAccess 2009, 39.3 per cent of women and 37.5 per cent of men accessed credit through informal sources against 14.3 per cent and 23.8 per cent who got loans from formal lenders respectively.

Women own less than four per cent of land titles—a popular form of security—- and this has been pointed out as the reason for their preference for small lenders who place lesser emphasis on security.

The infamous pyramid schemes that swallowed millions of Kenyans’ savings have shaken confidence in small credit firms.

“People are sensitive about new financial institutions that are coming up,” she said.

“Those already with us realise that at any one time, they have more of our money than we have theirs and it helps reassure them” .

WESO has invested several million shillings in capital which is provided by seven directors who hold shares based on their capital contributions.

Juster says that it will take at least two years before a positive return on investment can be seen.

MFI sector

“You have to be very patient in the MFI sector. You will fail if your overriding motive is to make a quick shilling. The business model has a social component to it. You help improve people’s lives as you make a profit—which is necessary to ensure sustainability of the business,” she said.

Increased demand for credit products has made the government to regulate financial institutions that are rising to fill the gap left by formal lenders.

Usage of credit products increased from 31 per cent in 2006 to 38 per cent in 2009.

Bank loans in 2009 increased by 0.8 per cent from 1.8 per cent in 2006 compared to one per cent increase from 0.8 per cent in MFI loans in the period under review.

The uptake of micro finance services is expected to expand with the enactment of a micro-finance law last year that empowers the Central Bank to licence, regulate, and supervise any deposit-taking micro-finance institutions.

Their inclusion in the deposit insurance scheme, Deposit Protection Fund Board, is also expected to increase the level of public confidence.

In June, Faulu Kenya became the first micro-finance institution in the country to start taking deposits from the public after receiving a licence from the Central Bank.

Other MFIs are expected to follow soon but the stringent requirements by CBK, designed to protect depositors’ cash, have proved hard to meet.

Minimum capital requirements for MFIs taking deposits come in two tiers: Sh20 million for those operating regionally (in districts or provinces) and Sh60 million for national presence.

According to a directive issued last year by the Central Bank , non-deposit taking institutions are required to open joint accounts with their clients at institutions licensed to take deposits.

The MFIs are instructed not to intermediate or borrow against such funds.

Analysts question the purpose of the accounts if the MFIs cannot use them to recoup part of their money after proving that a client has defaulted after receiving a loan.

Attempts by Business Daily to get a comment from the regulator, CBK, proved unsuccessful.