FSD Kenya

WORKING WITH FSD
FSD works with a wide range of partners across government, the private sector
and non-governmental organisations. We are always open to any new ideas and
partnerships where they can contribute to our mission of increasing financial
inclusion in Kenya. Since our aim is to help in developing markets which are
changing rapidly, we do not prescribe a specific rigid process for organisations
wanting to work with FSD. There is no application form. Nevertheless we do have
principles which guide the way in which we work. Anything in which FSD is
involved must clearly contribute to the development of inclusive finance in Kenya.
FSD can invest in building financial markets through technical assistance, grants,
loans or equity. The long-term return we seek is in terms of the contribution to
increasing financial inclusion. A major concern is to ensure that our funding does
not contribute to market distortions – especially anything which might give an
unfair competitive advantage to a particular market player.
We always expect to see our partners taking a significant and tangible stake
in projects, sharing the costs and risks. In working with the private sector an
appropriate level of financial contribution is essential. Where our funding is
used by ourselves or our partners to purchase goods and services, best practice
procurement principles must be followed. We want to encourage fair and open
FSD Kenya
Financial Sector Deepening
competition stimulating the development of markets while simultaneously
ensuring the process is efficient and maximises value for money. In partnering
with the private sector, we take a business-like approach. Our commitments will
always be clear and honoured. Simultaneously partners are expected to achieve
agreed targets.
MORE ABOUT FSD
We have an active information programme and are always delighted to answer
questions about our work or Kenya’s financial sector. Often the easiest way to
obtain information is simply to visit our web-site on www.fsdkenya.org. This
provides a range of up-to-date information and links to the sites many of our
partners. All the studies published by FSD are available for download electronically
from our web-site. If you have a specific question then this can be addressed to
info@fsdkenya.org. We will respond to all queries as quickly as possible and you
should always receive a reply within one week. Our quarterly newsletter contains
updates on FSD’s programme and can be downloaded from our web-site or
e-mailed to you directly (let us know if you’d like to be included on our mailing
list). Many of our publications are also available in hardcopy form and can be
obtained on request.
info@fsdkenya.org • www.fsdkenya.org
FSD Kenya is an independent Trust established to support the development of inclusive financial markets in Kenya
4th Floor Kenya Re Towers • Off Ragati Road, Upper Hill • P.O. Box 11353, 00100 Nairobi, Kenya
T +254 (20) 2718809, 2718814 • M +254 (724) 319706, (735) 319706
FSD Kenya
Supporting the development of inclusive financial markets in Kenya
FSD Kenya
Financial Sector Deepening

FSD Kenya
FINANCIAL INCLUSION
The importance of the financial system to economic development is well
understood and Kenya’s long-term national strategy, Vision 2030, identifies the
sector as one of the country’s core growth pillars. While generally more developed
than others in the region, Kenya’s financial sector remains far from achieving its
full potential. Despite considerable progress in the last decade, the financial sector
in Kenya has only met a modest fraction of the growing demand from poorer
households and micro, small and medium enterprises.
Credit plays a vital role in supporting productive growth among businesses at
all scales, from large to small, and across all sectors from agriculture to services.
Smaller scale enterprises are of especial importance from the perspective of
poverty reduction given the direct impact of
such businesses – especially in the agricultural
sector – on the livelihoods of poorer people.
However the significance of financial services
goes far beyond credit. It is now firmly
established that secure, high quality savings
rank among the most needed financial services
by poorer households. Savings allow poorer households to manage their finances
in order to deal with routine fluctuations in cash-flows, cope with emergencies
and accumulate for investment in the household or productive opportunities.
In fact the whole spectrum of financial services encompassing credit, savings,
money transfer and insurance can be relevant to the livelihoods of the poor.
New technologies such as Safaricom’s mobile phone based payments service,
M-PESA, promise to revolutionise access to finance in Kenya. The Central Bank
of Kenya (CBK) is developing the regulatory framework to support these new
approaches. FSD is partnering with CBK in this work.
Established in early 2005, FSD Kenya aims to support the development of inclusive financial
markets in Kenya as a means to stimulate wealth creation and reduce poverty. Working in
partnership with the financial services industry our goal is to significantly expand access to
services among lower income households and smaller scale enterprises. FSD operates as an
independent Trust under the supervision of professional trustees, with policy guidance from its
programme investment committee. Finance is provided by a number of development partners
including the UK’s Department for International Development (DFID), the World Bank, the
Swedish International Development Agency (SIDA), Agence Francaise de Developpement
(AFD), the Bill and Melinda Gates Foundation together with the Government of Kenya.
FSD takes a market-based
approach to financial sector
development
FSD KENYA’S APPROACH: BUILDING MARKETS
FSD takes a market based approach to financial sector development. Evidence from
a diverse range of institutions in Kenya clearly shows that financial services can
be provided to low income markets and smaller scale enterprise on a profitable
basis. The essential challenge faced in developing pro-poor finance is in opening
up these markets.
Constraints to market development may exist at a number of levels. At the
broadest level, Government policy, legislation, regulation and supervision sets
the basic framework within which markets operate. An effective framework can
help create viable markets by reducing the costs and risks of doing business.
Looking at the other end of the spectrum, it is retail financial providers – from
investment banks through micro-finance
institutions (MFIs) and savings and credit cooperatives
(SACCOS) to village banks – who
actually deliver services. Developing practical
know-how among financial institutions is at
the heart of market development. Investors are
frequently deterred by the risk of expanding
into unfamiliar markets where they lack experience or relevant technical expertise.
The efficiency and effectiveness of retail providers is often strongly shaped by
the business markets and other support structures in which they are embedded.
These commonly include audit, human resource development or training services,
information technology, credit reference, payments processors, ATM providers,
marketing, research and business consultancy. This forms a middle level, between
the retail and policy levels, which needs to be addressed. Market development
can be enhanced by building capacity and know-how among relevant service
providers and business membership associations.
HOW WE WORK
FSD’s primary focus is developing the capacity of the financial services industry,
working directly with a diverse range of financial institutions, business service
providers and support institutions. In doing so, we aim to complement other
initiatives – such as reforms of the enabling environment and wholesale lending
or investments programmes supporting emergent MFIs.
The starting point for FSD’s involvement is an analysis of the specific market context
and identification of the underlying constraints. FSD’s approach is one of investing
in the development of sustainable financial markets, regardless of how we actually
provide our support. We do not offer subsidies as a ‘quick-fix’ to encourage service
delivery where there is no credible prospect of a market solution emerging. What
we actually offer will depend on what is needed and can range from specialist
know-how to finance.
FOCAL THEMES
To ensure coherence in activity and maximise impact, our work is focused on a
limited number of themes. Reviewed annually, these themes evolve as markets
develop. Priorities change and new opportunities are presented. FSD currently has
three themes:
Core financial system
Developing basic financial services delivery capacity remains at the heart of
achieving our goal of making financial markets work for the poor. Efficient and
sustainable capacity in the financial services industry provides the essential basis
for delivering services to lower income consumers or smaller scale enterprise,
whether directly or indirectly. Much of the work in this theme also directly
underpins our second theme area on rural finance. Considerable progress has
been made in recent years with the rapid growth of a number of MFIs and banks
addressing consumers towards the ‘bottom of the pyramid’. With the success of
these institutions, our current strategy is shifting from an earlier emphasis on direct
support for industry players to addressing the needs of this emergent industry
as a whole. Developing support for training and skills development needed by
low-income oriented financial institutions exemplifies this type of industry-wide
work.
Rural finance
Data from the FinAccess 2009 study found that Kenyans
in rural areas are less than half as likely to use banking
services by comparison with those in the urban centres.
Furthermore with around four out of every five Kenyans
involved directly or indirectly in the agricultural sector,
agricultural finance is clearly a major priority within the
rural context. Much will be achieved by working with the
financial sector in developing new products appropriate to the needs of rural areas
and delivering them through new lower cost channels. Innovative approaches to
managing risk – such as new weather insurance techniques – can help credit
providers address the particular characteristics of risk in rural areas.
Community based financial organisations can provide services to lowincome
people in more remote rural areas far beyond the current reach of
formal banks. FSD is engaged in a number of initiatives to strengthen and
expand community based financial groups.
FSD’s work is
currently focused on
three major themes
Delivering social protection payments through the financial system can help
bring new services to whole communities. FSD is promoting the development
of payments solutions through the financial sector.
Nevertheless many very poor households and micro enterprises in rural areas are
likely to remain beyond the reach of the formal financial sector for many years.
Community based finance can offer a much lower cost
way to provide basic services, especially in areas far
beyond major centres. Experience shows however that
there are challenges faced in governance and technical
capacity. These can lead to high rates of organisational
failure in community based financial organisations
resulting in losses to their members. In the more
sophisticated models, low-cost, appropriate training,
support and supervision can mitigate these problems. FSD is also supporting the
use of highly simplified group savings and loan association models which can
easily be operated by members without any prior knowledge of finance.
Finance for growth
Across the world, broad based economic growth has been strongly linked with the
development of the small and medium enterprise sector. Few financial institutions
address this market effectively. The products and underlying risk management
techniques of mainstream commercial banks fail to ‘scale-down’ to reach many
small and medium enterprises (SMEs) while those of micro-finance institutions
typically don’t ‘scale-up’. Successful products for this market can borrow techniques
from both, but a more nuanced approach is needed which addresses the distinctive
credit management challenges posed by SMEs.
International experience shows that techniques can be developed which allow
SME lending to be undertaken profitably in a developing economy context. FSD
has been working directly with pioneering institutions seeking to build SME
finance capability. More recently we have started to a work at a broader level,
supporting the implementation of credit reference in Kenya which can significantly
reduce costs of SME credit analysis, improving access.
FSD Kenya
Financial Sector Deepening