REFERENTES TEÓRICOS DE DIDÁCTICA

As part of an effort to minimise fragmentation and improve on the formality of operations in Kenya‟s MFI sector, the Government enacted the Microfinance Act

(hereafter the Act) which came in force in May 2008 (CBK, 2008). The Act seeks to regulate both deposit-taking and non deposit-taking MFIs in Kenya with a view to enhancing orderly growth, stability and efficiency in microfinance operations (CBK, 2008, GOK, 2006c). Following this development, MFIs that choose to transform and apply to be licensed under the Act are expected to draw several benefits including; increased access to additional sources of loanable funds, ability to offer a diverse set of

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According to the 2009 Financial Services Access Survey reported by the Central Bank of Kenya, nearly one third (32.7%) of Kenyans aged above 18 years do not have access to credit (CBK, 2009).

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The absence of a specific Act to regulate the operations of MFIs in Kenya was blamed for plunging the sector into chaos after the massive collapse of numerous deposit-taking outfits (ponzi schemes disguised as MFIs) in 2007 (CBK, 2007; Ombati, 2007).

42 financial products, and enhanced corporate governance through improved internal controls, among others (CBK, 2008).

Notwithstanding the benefits noted above, the Act comes with a number of limitations. Firstly, according to section 3(3) of the Act; banks, building societies, and the Post Office Bank of Kenya are not subject to it (GOK, 2006c). Perhaps in the government‟s view these are adequately covered by their respective Acts of Kenyan law. However their exemption provides potential for unfair competition given the fact some of them are already engaged in microfinancing activities anyway. As discussed previously in this chapter (see sections 2.3.1 and 2.3.2) some banks and indeed the Post Bank engage in microfinance activities. Secondly, the Act [section 4(1)] stipulates that MFIs can be legally established only under three options; namely limited company, wholly-owned bank subsidiary, and as MFIs (GOK, 2006c). Although the diverse legal frameworks under which MFIs currently operate arguably should not be encouraged, limiting to three options appears to be overly restrictive. For example the Act precludes MFIs that are operating as SACCOs, NGOs, CBOs, Church based programmes, and Trusts mostly engaged in wholesale microfinance. If these institutions are to continue undertaking microfinance activities, including taking deposits, they are expected to transform into an „appropriate legal form‟ which arguably could lead to unnecessary and costly structural reorganisations with potential for conflict of interest and loss of focus.

Thirdly, section 14(1) of the Act (GOK, 2006c) states that MFIs are not permitted to offer the following products; issue third party cheques, operate current accounts, facilitate foreign trade operations, undertake trust operations, and underwrite securities. These provisions seem to contradict the potential to diversify financial products (stated above) and, as such, arguably leave MFIs with little flexibility for much desired product innovation. Fourthly, within the Act the Minister appears to have excessive powers in regulating the affairs of the MFI sector in the country. For example, the Minister is responsible not only for prescribing the categories of MFI activity19 (section 7 of the Act), an issue that goes to the heart of the entire Act, but also amending the minimum

19 _{In exercising his duties under the Microfinance Act 2008, the Minister published the „Microfinance} (Categorization of Deposit-taking Microfinance Institutions) Regulations‟, 2008 that sought to clarify what constitutes deposit-taking MFIs by creating two categories i.e. national and community MFIs (www.kenyalaw.org). Whereas national MFIs have branches spread across the country, community MFIs have a network operating in one administrative division in a city or district. This classification arguably grossly misclassifies MFIs operating in communities across more than one district.

43 capital20 required to run an MFI; an action with a direct effect on liabilities applicable to an MFI.

Fifthly, the Act [section 16. (2)] provides that a person seeking a loan should provide evidence of ability to repay, yet section 17(2) prohibits MFIs from using client deposits and/ or shares as loan security. This provision has two implications, firstly in order to access credit MFI clients will need to raise tangible collateral, which essentially goes against the vision of microfinancing. Secondly, it appears MFIs are likely to have increased access to loanable funds from accumulated client savings, but that their clients will not benefit from their own savings. This is likely to be the case for MFIs operating as SACCOs, ROSCAs, and ASCAs; which rely mainly on clients‟ savings and shares as alternative collateral for loans.

Although the purpose of the Act is to regulate and improve on the coordination of MFI activities in Kenya, its current provisions on legal identity for MFIs appear to favour deposit-taking credit only MFIs with a commercial orientation and not other forms of microfinance. Perhaps the limitations discussed here could be part of the reasons why there has been a slow uptake on licensing applications as required under the act. As at October 2008, five months after the act came into force21, only two MFIs had applied for licensing with the CBK (Ondari, 2008). In addition the AMFI has not only petitioned the minister to be accorded regulatory rights, in the spirit of promoting self- regulation within the microfinance industry, but also raised concerns about the plight of those MFIs which fail to meet the stringent requirements of the act (Ondari, 2008). In this regard, unless the Act is revised appropriately, the future of MFIs operating on the integrated credit delivery model, for example NGOs and Church programmes with a poverty alleviation objective, appears bleak.

From the foregoing it is clear that Kenya‟s MFI industry, as a pillar towards promoting growth and development of MSEs, has come a long way. Although the number of institutions offering microfinance services has increased over the years, this appears not

20 _{At the time of writing, as per the „Minimum capital requirements‟ Schedule of the Microfinance Act} 2008 part (d), Kenya‟s MFIs are required to hold KES 60 million (AUD 1.2 million ) as core capital (GOK, R. O. K. (2006c) The Microfinance Act. Kenya gazette supplement no., 103.. This figure is 24% and 30% of the core capital levied on Kenyan financial institutions and banks, respectively.

21 _{This leaves MFIs that wish to be licensed as deposit-taking financial institutions, under the act, barely} seven months before expiry of the twelve months‟ transition period provided under the new legislation Ibid..

44 to have been matched by an expansion in the service portfolio in line with the diverse needs of MSEs. Notwithstanding this, access to microfinance services among Kenya‟s MSEs, for example, affordable credit and training, is arguably undermined by the lack of an appropriate and effective policy framework for both the MSE and MFI sectors alike. From an empirical perspective, although access to credit among Kenya‟s MSEs has been studied [for example, (Akoten, 2007b, CBK, 2009, Atieno, 2001b)], assessment of the contribution of BDS provision to MSE development in Kenya is scant. This study seeks to assess whether MSE owner-managers with access to BDS enjoined with microcredit, experience significant improvement in the performance of their enterprises. The next section examines this issue from a broader perspective.