PRESENTED AT THE 5 TH AFRACA CONFERENCE ON MICROFINANCE HOLDING IN BENIN REPUBLIC

1. PRESENTED AT THE 5TH AFRACA CONFERENCE ON MICROFINANCE HOLDING IN BENIN REPUBLIC FROM JULY 2ND - 4TH 2008. BY EMMA W. KIMANI K-REP FEDHA SERVICES LIMITED. KENYA

2. BACKGROUND OF KENYA’S FINANCIAL INDUSTRY • Nearly 40% Kenyans are financially excluded (FinAccess, 2006) with the majority of these in sparsely populated rural areas. • High transaction costs associated with low transaction sizes, poor infrastructure, high poverty incidences and low population densities typical of rural Kenya dissuade other service providers, such as MFIs, from operating in these areas (FSD News, 2007). • It is on this premise that this paper highlights K-Rep’s experience in implementing Financial Service Association in order to address the unmet financial needs in rural Kenya ‘s Arid and semi arid areas.

3. What is Financial Services Association • The FSAs (loosely referred to as village banks) were set up by K-Rep development Agency (KDA) in the arid and semi arid districts of Kenya. The funding to set them up was from USAID, DFID and DANIDA. The first one was opened in November 1997 • Financial Service Associations (FSAs) are membership based financial organizations offering credit, savings and money transaction services to their members • The FSA original model was `user owned and user managed’. This therefore meant that the shareholders ( members of the FSA) elect a board who in turn hire the staff to run the FSA .

4. Rationale for KFS creation contd. • KDA was faced with a lot of challenges whose main root was poor management and governance. • In trying to get the answer to these challenges, KDA started two different pilots: • Management contract arrangement where KDA would hire the manager with adequate skills and competences

5. Rationale for KFS creation contd • Formation of an Apex – the FSAs formed a superior board that took the position of KDA but FSAs contributed some money towards the maintenance of the structure • The pilot of the two models took place between 2003-2006.The outcome of the two pilot clearly pointed out that the intervention at the management level had a greater impact on the survival and indeed sustainability of the FSA

6. Rationale for KFS creation contd • It is against this background that KDA wrote a proposal to FSD-K (Financial Sector Deepening Trust- Kenya) to enable KDA to introduce the management contract concept. • The issue of sustainability at the FSA and the KDA level was of paramount important • KDA and FSD-K jointly agreed to create a limited liability Company that would offer management services to the FSA at a fee and inculcate in it a corporate culture devoid of the NGO culture.

7. Transformation of the FSA: what KFS had to embark on • Market Research: • The research considered the views of existing and potential clients/shareholders on products and services offered and also the institutional positioning. Market research is vital and is constantly being used to inform management on various issues.

8. Transformation continues • Product refinement and development • to re-examine the existing products in the context of the research and identified refinements which were implemented. At this stage the aim was not to develop entirely new products which would have required considerable effort to implement but took opportunities for more modest enhancements.

9. Transformation continues • Risk analysis • A thorough analysis of risk across the FSA looking at both credit risk and operational risk was done. It revealed deficiencies in the effective management of both types of risk which contributed to high arrears rates seen across a large number of FSAs, while the latter has resulted in a number of frauds.

10. Transformation continues • Business process mapping • A major focus in the refinement of the basic FSA model has been the institutionalising identified improvements in the business processesandsystems ) Process mapping was undertaken as a part of the risk analysis with the aim of identifying opportunities for improvements to processes, either to better control risks or enhance efficiency.

11. Transformation continues • Systems • A review and possible refinement of the current manual systems for accounting, portfolio monitoring and production of management information was logically undertaken in conjunction with operational risk analysis and process mapping.

12. Strategic and business planning • KFS head office staff will equip the FSA managers with skills in strategic and business planning that will enable them to take the lead in planning at the FSA level with the support of the branch and head office.

13. KFS SERVICE OFFER TO FSAS • Strategic and Business Planning • Financial Management • Business Development • Operations Management • Management Information Systems (MIS) • Advocacy • Capacity building

14. Impact on transformation

15. Impact on transformation

16. Lessons learnt • planning and execution of the strategies faster than the competition is a must! • Maintain a culture that recognizes and rewards performance • Market led products is the only way to maintain royal happy customers and a happy FSA • There are risks associated with rapid growth that need to be acted upon once identified • There is huge potential that remains to be tapped

17. Current Challenges • lack of effective governance at the FSA level who can drive the vision of the FSA and continue to increase the return on the shareholders wealth • Having staff working together in the same FSA but have different employers • Retention of the skilled staff is a huge challenge as the major banks and MFIs offer them high packages

18. End • Thank you