Six million Kenyans locked out of banking system

Central Bank of Kenya Governor Njuguna Ndung’u says financial systems are now offering a wide range of services due to expansions in infrastructure including innovation in products [PHOTO: FILE]

By Nicholas  Waitathu

About five million Kenyans are locked of the financial services system, a new survey reveals. The FinAccess National Survey 2013 released yesterday shows that more than a quarter of the 18.5 million eligible Kenyans are excluded from any form of financial services. Another 1.4 million rely on shylocks and friends for loans.

According to the Financial Sector Deepening (FSD) study, clients who use shylocks include women and youth, mostly from rural areas,  as they shy away from the formal banking system due to entry barriers.

“People between the age of 18 and 25, and those over 55 years are accounting for 30.1 per cent and 37.1 per cent respectively of those who are outside formal banking. A further 60.7 per cent of them are illiterate,” the report states.

The high interest rates charged by commercial banks has been the biggest barrier for many Kenyans. Although the Central Bank’s Monetary Policy Committee has kept the base-lending rate at 8.5 per cent for close to a year, this has not been passed to the public through lower rates.

Potential borrowers

Banks have argued that their rates were a factor of many issues apart from the Central Bank Rate (CBR).

Some banks charge as high as 20 per cent, pushing potential borrowers to alternatives such as shylocks and ‘merry-go-rounds’.

From the report that covers 2013, more than 12.4 million Kenyans, who  represent 66.7 per cent of the adult population, visited commercial banks, deposit taking and microfinance institutions to borrow or withdraw cash. Amrik Heyer, head of knowledge at Financial Sector Deepening Kenya, says more women are excluded from the financial services than men.  More than 26.6 per cent women of 18.5 million Kenyans do not access any form of financial services.

“This is higher compared to 24.2 per cent of men who are locked out from the financial systems,” said Dr Heyer.

The women largely borrow from shylocks to finance small businesses such as sukuma wiki, charcoal, tomatoes, kerosene and dairy farming in informal settlements and rural areas. The report shows a big disparity in access to financial services, with more than 50 per cent of the poorest Kenyans excluded from the formal banking system. However, nearly 70 per cent of the wealthiest access financial services from formal prudential financial providers.

Central Bank of Kenya Governor Njuguna Ndung’u said the financial system is now offering a wide range of financial services and products to more Kenyans.

“These developments are attributable to expansions in financial sector infrastructure including innovation in products, adaptive institutional outreach and advances in technology,” Prof Ndung’u said. 

Deposit taking  

According to a Geographic Information System (GIS) spatial mapping of all Financial Access Touch Points, also launched in Nairobi yesterday, 30.6 per cent of those who benefit from the unregulated groups live in the rural areas. This is compared to 15.8 per cent operating in the urban areas though this number has been going down in urban areas.

Most banks and deposit taking institutions are yet to open branches in rural areas largely due to poor infrastructure and insecurity. 

With a growing middle class, formal financial institutions have been expanding their market reach in urban areas to tap into emerging opportunities.

“The decrease in the proportion of people excluded between 2009 and 2013 was 6 per cent compared with a 7.9 per cent decrease between 2006 and 2009,” Heyer noted.

According to the report, more than double the number of adults use mobile phone financial services compared to 5.4 million who use banks.

When lending, banks seek to ensure that advances (loans) they extend are repaid, and prefer the repayment done according to the formal agreement (loan contract).

When initiating a loan, both parties – the customer and the bank – go through a decision making process. On the bank’s side, the credit analyst will assess the probability of full repayment as stipulated in the contract. This process is called risk analysis and it includes assessing actual facts about the customer.