S Johnson LFM

The dynamics of competition in Karatina’s financial markets: 

The dynamics of competition in Karatina’s financial markets Susan Johnson Centre for Development Studies University of Bath Impact Global Meeting: May 2003

Objectives of the research: 

Objectives of the research Key questions re the financial landscape: What services are available? How have these been changing? What determines options available to users and the choices that they make? How have changes in informal sector provision changed in response to changing formal sector provision? How can changing patterns of provision be explained?

Field research : 

Field research Karatina in Mathira Division, Central Kenya Coffee, tea, dairy area – high agric potential First round 1999-2001 detailed work Supply side survey: 37 formal sector providers: products; p & q Identification of informal mechanisms Demand side: 150 random household survey evenly spread across tea and coffee zones and town (employment and enterprise) 68 individual interviews based on age, sex, marital status and location to obtain detailed financial use data 2003 follow up: resurvey of main suppliers Demand side – Microsave tools, 10 groups

Mathira’s financial landscape: 

Mathira’s financial landscape Supply side: Banks account for 80% of deposits, 68% of loans and 49% of accounts SACCOs: 17% of deposits, 18% of loans and 39% of accounts Managed ASCAs: 3% of deposits, 10% of loans and 10% of accounts Mainstream MFOs: 1% of deposits, 4% of loans and 2% of accounts Mutuals significant - 21% of deposits; 28% of loans; 49% of accounts. Bank on-lending low: local lending 37% of deposits; 45% total deposits not on lent Getting a loan from a bank is like “milking an elephant!”

Mathira’s financial landscape: 

Mathira’s financial landscape Demand side: Saving in ROSCAs (49%) & banks (46%) Gender significant in ROSCA use Bank borrowing – few loans (7%) & not land secured Use of rural SACCOs (34%) & friends and relatives (18%) Borrowing from friends/rels – educated young men If include ROSCAs these also the biggest loan source Mutuals also significant on demand side in terms of extent of use – Qualitative evidence that ASCAs increasing Why?

Explaining Karatina’s financial markets : 

Explaining Karatina’s financial markets Why mutuals are popular Savings discipline and security: Access to loans: “a right not a privilege” Interest rates: level & stability Options in event of payment problems Collateral is savings and future income – not land Very little bank lending especially against land as collateral

Developments in the market 1999-2003: 

Developments in the market 1999-2003 Savings services: Bank deposit accounts: redesigned to go down market SACCO accounts increasing proportion of the market Competition for salary and tea farmers Loan products: Banks starting to lend unsecured esp against salaries SACCOs little change but advances against income MFO loan products - expanded coverage +40% Emergency/education Smaller groups Managed ASCAs – apparent growth as organisations split

Developments (continued): 

Developments (continued) Interest rates: Bank rates fallen from 20-25% to approx 14-18% and TB rates approx 7% MFOs flat rates 18-22% Mixture of flat and declining rates which people don’t understand the difference between Now people see MFO rates differently Multiple membership and default Overlapping social networks Need for bigger loans but risks of bigger businesses But risk of over-extension and default problems in 2001-2 Macroeconomic context

Discussion of developments: 

Discussion of developments Role of MFOs in extending outreach? MFO product little changed Managed ASCA model more popular Demonstration effects? MFOs demonstration of existence of small business sector Equity building society now a key competitor and learning how to lend, banks moving down market esp interested in salaries and tea farmers Locally owned or managed appear more responsive to market developments both demonstration and competition effects Managed ASCA demonstration effects strong

Implications for MFOs in Kenya: 

Implications for MFOs in Kenya Interest rates and client education needed Expansion strategies should be co-ordinated MFOs see a very segmented market but medium term (post MF bill) likely to pitch them against players that have become much more competitive These competitors have a range of products especially savings and individual loans MFO co-operation needed to strategically position the industry for the future