Nairobi — In this continent and in other less developed countries, it is estimated that over 65 per cent of the citizens remain un-served by the individual country's formal financial sector.

The latest FinAccess survey puts this percentage at 80 for Kenya.

Therefore, the citizens of these countries have no dependable sources of financial services, especially credit, which is essential and critical for those wishing to engage in any kind of business activity in a predictable and long-term sustainable manner.

Most of these countries' citizens will invariably receive limited and unpredictable funding to support their business activities from the NGO managed MFIs and/or from loan sharks (money lenders) in the country concerned.

There is said to be over 100 NGO managed MFIs and over 20 money lenders who provide similar unpredictable services to a limited number of the Kenyan active poor.

Yet, it has been proven beyond any reasonable doubt that robust and long-term sustainable economic growth and prosperity cannot be achieved without putting in place well focused and regulated programmes to reduce poverty through empowering the majority of the country's citizens by increasing their access to the factors of production, especially dependable, predictable and timely credit.

In any country, the latent capacity of the active poor for entrepreneurship would be significantly enhanced through the provision of long-term sustainable microfinance services, to enable them to engage in profitable economic and income generating activities.

The resultant income gains from these activities would make them more self reliant. This amounts to giving them "a hand" not "a hand out", thereby increasing their sense of self-worth and personal dignity, as a continuous state of dependence destroys one's dignity and self-respect, erodes hope and creates a sense of helplessness!

I assume it is with the above in mind that our Ministry of Finance and the Central Bank of Kenya came up with the new Kenya Microfinance Bill, recently passed by the Parliament.

The new Microfinance Bill would facilitate the establishment of a vibrant, all inclusive, coordinated, focused and long-term sustainable Microfinance sector in Kenya, through CBK regulated Microfinance Banks (MF Banks), which are professionally managed and with accountable board.

These MF Banks would be expected to offer diversified and competitively priced microfinance products, to achieve the following necessary and desirable results.

First , to allow for country-wide local savings mobilisation, insured and protected by the Central Bank of Kenya's (CBK) Deposit Protection Fund (DPF). Once the clients of the MF Banks know that their deposits are protected by DPF, it will improve their confidence and encourage them to safe more.

Secondly, because of these new MF Banks' strong capital base (that will increase their volume of on-lending funds and enable them to enjoy economies of scale), increased institutional capacity, required professionalism and accountable governance and because they will be regulated and supervised by the CBK, they are likely to achieve wider outreach within a reasonably short period and do so without sacrificing portfolio quality!

They will, also be expected, indeed required, to observe the internationally accepted "Best Practices" in microfinance.

They will also lead to local employment generation because as the individual entrepreneur's business grows, he/she will find it essential to hire additional help to assist in managing the growing business.

Finally, and with more "surplus cash" - as business widens- they will be able to accumulate assets and create wealth.

It is this creation of wealth in the personal level that results in a large "middle class" in a country, with real purchasing power; adds to growth in the country's GNP and contributes to sustainable national development.

It is informative to state here that in South Africa, in some countries in the South Asia and the Pacific Region and others in Latin America, microfinance and SME activities contribute 30-40 per cent to these countries' GNP.

But having said that all these cannot be entrusted to NGOs and with a reason.

For the last 15 years, membership based NGO MFIs, involved in credit only microfinance, have increased significantly, mainly due to the inability of the country's formal sector to provide the financial services needed by the active poor.

Whereas these NGO MFIs have limited outreach, mainly due to the un-sustainability of sources of funding, it is fair to recognise their existence and appreciate their commendable past and the present contributions, albeit limited.

However, the important and critical national role of providing dependable, predictable, timely and long-term sustainable financial services to 80 per cent of the Kenyan active poor, who continue to remain un-served by the formal financial sector of Kenya, cannot continue to be entrusted to NGOs managed MFIs.

New institutions to serve the large un-served market and to empower the Kenyan economically active poor are not only necessary, they are essential.

These new institutions, under the purview of the CBK, would enhance organised/coordinated, systematic, focused and long-term sustainable participation of the poor in the socio-economic development of their country and widen resources distribution.

On the other hand, while most of the NGO managed MFIs may not wish and/or be in a position to meet the various requirements that would place them under the supervision of the Central Bank of Kenya, those who wish to do so and would meet the specified provisions, as stipulated in the new Kenya Microfinance Bill, should be nurtured, encouraged and supported with the necessary capacity building to do so.

Those in the know (the CEO of K-REP Bank and the MD of the Association of Kenya Microfinance) believe that the five largest MFIs, namely, KWFT, Faulu Kenya, Jamii Bora, SMEP and Kadet will submit their application for transformation to MF Banks, once the Regulatory Guideline is approved.

About 20 of the current money lenders are, also, expected to apply for licences to become MF Banks.

Both groups would require immediate and extensive advice on transformation/conversion process, recruitment of appropriate staff for regulated MF Banks, selection of the appropriate MIS and generally, a systematic and continuous capacity building support, to position themselves for a new "ball game" if they have to succeed.

About the writer

Muhota wa Kimotho did his Masters and PhD studies in Economic Development, Finance and Banking at the University of California, Los Angeles (UCLA) and holds diplomas in Economic Development, Advanced Credit Analysis and Banking and Finance, from various institutions in the US, the UK and Europe.

He started his career as a lecturer in Economics Development at the University of Nairobi. In 1970, he joined the then London-based National Grindlays Bank, which later became the Kenya Commercial Bank Group, as the Chief Economist/Chief Planning Officer and eventually served as Assistant General Manager/Director of Credit, Business Advisory and Legal Services departments.

In 2001, Mr Kimotho joined the Catholic Relief Services (CRS) as the Director/Senior Technical Advisor for Microfinance based in Baltimore, Maryland, in USA.

From January 2002-2005, he was the CRS Microfinance Regional Technical Advisor for South East Asia and the Pacific Region, covering six countries in the Region, namely; Philippines, Indonesia, Thailand, Cambodia, Vietnam and East Timor.

Currently he works for UNDP as the Policy and Technical Advisor for Microfinance, Small and Medium Enterprise (SME) Development, seconded as an Advisor to the Central Bank of Nigeria.

In 1999, his name was selected for publication in the 1999/2000 "WHO's WHO" of the World", World Edition in Finance and Banking.

Mr. Kimotho is, also, a Member of the Financial Executive Networking Group (FENG) of United States.

Three (3) of his publications, which include a Microfinance Operations Manual (in English and French) and a Microfinance Audit Manual, have appeared in the CGAP Microfinance Gateway.