Kenyan Microfinance

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Picking up from yesterday's microfinance discussion, let's have a look at what's happening in Kenya. Over at CGAP, Kate McKee discusses the relationship between microfinance and consumer protection. Through interviews with a Kenyan driver who runs his own taxi company, McKee highlights three potential consumer protection problems:

  1. Lack of transparency on the all-in cost of credit. Microfinance interest rates are often quoted by the month, rather than annually, and frequently omit the miscellaneous fees that go along with taking out such loans. As McKee notes, "studies by Microfinance Transparency suggest that the actual cost of credit is typically MUCH higher than customers understand, and soon-to-be-published data for Kenya is highly likely to reveal the same reality."
  2. As mentioned earlier in David Roodman's discussion of Bangladesh, the problem over over-indebtedness and taking on multiple microfinance loans may trap borrowers in a debt spiral.
  3. The third problem has more to do with traditional banks in developing countries, which charge high fees for simple procedures. McKee's driver pays $10 a month in fees to maintain a savings account.

McKee offers two solutions: First, the increasing ubiquity of ATMs in countries like Kenya will make it easier for entrepreneurs to make fast and frequent deposits, protecting their savings from the risks of hording cash. Second, mobile phone payment services will further mitigate the risks associated with dealing primarily with cash.

For those looking for more information about microfinance in Kenya, I encourage you to attend this year's Finance and Private Sector Development Forum, which will take place at the World Bank headquarters in Washington on March 2-3. The lunchtime keynote speaker on March 2nd will be Ingrid Munro, founder of the Kenyan microfinance institution Jamii Bora

Ms Munro will be complimenting the ever-caustic Niall Ferguson, who will lead a discussion on March 3 about whether developing countries can learn from the history of money, or if they are simply doomed to repeat it.

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