Serving the low income consumer in Kenya:

Lois Eva Adongo
Aug 27, 2017 · 6 min read

How financial service providers can tackle this mostly ignored market

“Auntie salon! auntie salon!” Hail a bunch of about five women as they quickly surround me.

They are hairdressers.

“Not today, thanks” I shake my head.

“Come on,” Nyarwa, my long-time hairdresser, pats my shoulder urging me along. She comes to my rescue.

They do not give up easily.

The female hairdressers are a common sight around the two entrances of the market.

Commonly referred to as otengas — vultures — they sit here all day like askaris.

Armed only with colorful samples of their braid work that customers use to select their preferred hairstyle.

Kenyatta market is made of multiple stalls divided into nameless sections and alleys depending on what its merchants collectively sell. Walking down a narrow alley, I made a right and hit my designated stop, the hairdressers’ and barbers’ section.

It is a hot Monday morning in March, and unlike on past visits to this market when I come only to do my hair, today I have an additional item on my agenda.

I am out on a quest to explore the paradox of financial inclusion in this market setting.

My mission today stems from recent developments in Kenya’s financial sector.

Counting losses on account of slowed lending and reduced interest income which for a long time was their core business, banks in Kenya are crying foul even as they sit on US$2.3 billion of idle cash.

Interestingly though, all along Kenyan banks have served only a small minority. And comfortably so.

They have largely ignored more than 90% of Kenyans, assuming they either are too poor, too risky, or both, to be their customers.

Below are three observations from the visit to Kenyatta market:

An economic model with a strong social dimension

Most of the merchants I speak to indicate that the preference for chamas (a loose informal grouping of like-minded individuals for collective savings and pay-outs) as a financial tool.

In this context, the use of relatively semi-formal financial devices makes sense because of their inherent ability to cater to routine daily needs which require quick access to funds, and future goal setting which requires foregoing present needs or desires.

Chamas take different forms depending on the season, function and cycle.

For example, chamas for buying household provisions for members are normally active around December while Monday chamas exist for larger financial contributions.

Some chamas also have an element of enforcement, e.g. the foodstuff buying chamas exist to ensure that members’ children do not go hungry.

The length of a payment cycle — how long it takes before a member receives their pay-out — is also a factor in chama membership.

Because of past experiences of flight risks among members who suddenly received a windfall amount in the longer-term payment cycles, the merchants prefer shorter cycles.

“ These oldies educated us back in the day”, chuckles Katish, one of the hairdressers. “I would never join a chama with more than a 1-month cycle”, she chimes.

The female hairdressers depend on the chamas as their chief financial tool, and had membership in more than one.

Their male counterparts on the other hand have a somewhat different experience with the chamas.

They participate in chamas mainly for the social aspect.

I’m curious to learn why.

“We prefer the larger, more organised and formally instituted Savings and Credit Co-operative Organisations (SACCOs) due to the opportunity of borrowing larger sums of money,” responds Kioko.

This could anecdotally also be attributed to the patriarchal nature of the Kenyan society that typically relies on the male figure to shoulder the larger household responsibilities.

Formal finance can leverage on these existing norms to create solutions that allow the low income to fully participate in the formal financial services space.

It doesn’t have to make sense to be efficient

The informal finance value chain runs deep.

While conventional formal finance is focused on maximizing profitability through cost cutting and efficiency, in the informal financial world, the focus is more on social inclusion.

I was initially taken aback at Mary’s response to my inquiry on their experience with formal credit. What with a fixed monthly interest rates of 30% compared to alternatives! Until she elaborated further.

“Here at the market, we rely on loan sharks that give us instant loans.”

Mind you this is at an interest rate of about 30%.

“Why should I stress myself with bank loans yet I have no property and when I default they come and take the little that I have?” She concludes.

“What about M-shwari or KCB-Mpesa?” I interject.

Obviously thinking in my head that it must make better economic sense to take a loan with M-shwari that charges a 7.5% one-time fee for a month-long loan.

“Hahaha …” chortles Vivi. “Last year, for the most part, I had about KShs 5,000 on M-shwari. But for whatever reason, my allowable loan limit always stalled at KShs 270.” She expounds, clearly frustrated at the logic — or lack thereof of in the credit scoring algorithm of M-shwari. “Depositing the same amount with my Chama or cooperative society automatically catapulted my credit limit to Kshs 15,000”, Achie adds.

That consumers shy away from banks because of past bad experiences, undue long KYC processes, and the need for collateral creates a financing gap.

And that is how they inevitably find themselves at the mercy of loan sharks.

As extractive and expensive as these alternative may be, the existing loan sharks’ proposition that supposedly fills this gap plays a very significant role.

Evidently from the above conversations, finance is played out across complex and elaborate value chains composed of many players each with very specific roles.

Looked at with a traditional “formal finance” lens, they may not make sense or even seem to be efficient models.

Tailor solutions to consumers’ erratic income patterns

It’s not that existing formal financial service systems are totally useless.

Or that these merchants I spoke to were outright unreasonable.

It’s a case of coming to a financial system where at fore the dominant paradigm is to budget expenses and manage predictable surplus money.

A system designed with a high net-worth individual in mind. The contract-based salaried employee with a regular salary or wage and some level of benefits.

Just like 85% of Kenyan adults, for the merchants at Kenyatta market, the dominant financial paradigm is managing missing money to avoid day to day hardships.

It’s a perennial game of survival for the fittest.

Their income flows are unpredictable (squarely determined by their sweet talking and sometimes scoffing skills); Infrequent (you may do 10 hairs this week, and none the next); and Vulnerable as they are not shielded from personal setbacks (no paid leave days or sick off days) or market shocks.

So, even when try as they may, to put their faith in this formal financial system, learn the ropes, and everything else outside of their comfort zone, they still come across impediments such as those described above.

This includes both the traditional brick and mortar institution with its plethora of KYC requirements; Digital solutions with their difficult to understand complex credit scoring techniques; As well as the multiplicity of steps involved in conducting a single digital transaction.

Verdict:

No question all efforts have been aimed at ensuring that as many Kenyans as possible are formally financially included.

Moving from a measly 20% financial inclusion rate in 2007 to 75.3% in 2017 according to the FinAccess surveys of 2006, 2009, and 2013, is no small feat.

As much as legal barriers to formal financial inclusion in Kenya may have been removed (a very critical step indeed) to the extent that anyone who wants to can typically open a bank account or subscribe for insurance, but by itself is not enough.

A quality experience that adds real value by solving pressing issues is essential for financial inclusion to be experienced by all.

It’s quite depressing that Kenya swanks a financial inclusion rate of 75.3% and yet only about 10% of its adult population have ever received a bank loan.

The figures for mortgages and private insurance are even more depressing. Investments and pensions stand at 10.6% and 12.5% respectively.

In essence, about 90% of the population thus subscribes to non-formal financial services as a fallback option.

As much as the above numbers don’t lie, its time to shift the narrative and the discourse to creating real value for the newly so-called “financially included”.

Lois Eva Adongo is a Nairobi-Based Digital Financial Services Specialist & Case Study Writer. She is also the chief digital story teller at EvaMtalii. Eva can be reached on Twitter @LoisEvaAdongo.

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Lois Eva Adongo

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Available for Opportunities in Financial Inclusion, Market Development & Partnerships | Nairobi-Based Digital Financial Services Writer & Travel Writer

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