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Toa Kitambulisho! Evolution of Registration of Persons in Kenya

Under the Registration of Persons Act (Cap.107), it is a requirement by the law of Kenya that a Kenyan citizen who attains the age of eighteen must have an Identity card facilitated through the Department of National Registration Bureau.

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Toa Kitambulisho! Evolution of Registration of Persons in Kenya
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Kipande

In 1915, the colonial government enacted the Native Registration Ordinance but it was not until 1919 and 1920 that it was implemented. The registration was an instrument to control and regulate the recruitment of African males into colonial labour. It contained a registration certificate and fingerprint of the holder. The Ordinance made it mandatory for all adult males aged 16 and above to be registered. Upon registration, they were issued with registration papers kept in metallic copper containers attached to a chain commonly referred to as “Kipande.” The Kipande was worn around the neck like a dog collar. The Kipande contained the wearer’s tribe, their strengths and weaknesses and comments from his employer on his competence, therefore, determining his pay or whether or not he would be employed.

The government used the Kipande to curtail freedom of Africans and monitor labour supply. It also empowered the police to stop a native anywhere and demand to be shown the document. For Africans, the Kipande was like a badge of slavery and sparked bitter protests.

Passbook

In 1947, the Kipande was replaced by an identity booklet which had fingerprints but not the bearers portrait. A new law, the Registration of Persons Ordinance, was passed to make it mandatory for all male persons of all races of 16 years and above to be registered. But under this new law, the identity cards issued distinguished between the protectorate and non-protectorate persons. Although the Ordinance sought to remove discrimination based on race, it made no attempt to remove gender-based discrimination. The trend continued even after independence until 1978 when an amendment was made to what has become the Registration of Persons Act (Cap 107, Laws of Kenya) to include the registration of women who had attained the age of 16 years and above. A further amendment to the Act was made in 1980 to raise the age of registration from 16 to 18 years.

The first generation Identity Cards

In 1980, legislation was amended to include women and the booklet was replaced by the “First Generation” paper identity card with subtle security features embedded in the new document. The document design contained the bearers portrait and fingerprints. Raphael Musau, who was the officer in charge of National Registration Bureau and driving the whole process, witnessed the handing over of the new generation national identity card to the former president Daniel Arap Moi. In 1977, Raphael Musau was requested by the then vice president Daniel Arap Moi to design a new Kenyan Identity card which was to replace the blue colonial passbook. His first port of call, accompanied by Principal Registrar of Persons, was De La Rue, Company in London who eventually were tasked with making the new design.

The second generation card

The first generation identity card was replaced in 1995 by the smaller credit-card size “Second Generation” card, that was in essence, a laminated paper card. The card includes basic information [name, sex, date and place of birth, date and place of issue] a photo, a signature and an image of one fingerprint.

Plastic card

In 2011, the second generation card, in turn, was upgraded to the present plastic card without fundamentally changing its features. The current generation of IDs therefore date back to 1995, the last time that the population was re-enrolled.

The card includes basic information [name, sex, date and place of birth, date and place of issue] a photo, a signature and an image of one fingerprint. It also includes a sequential 8-digit national ID number (just a sufficient number of digits to cover a population the size of Kenya’s) as well as a 9-digit serial number. The information on the front of the card is machine readable on the back. Since 2007 there have been intentions to move to a “Third Generation” e-ID card with a chip and enhanced security features, but these have not materialized because of financial constraints.


Under the Registration of Persons Act (Cap.107), it is a requirement by the law of Kenya that a Kenyan citizen who attains the age of eighteen must have an Identity card facilitated through the Department of National Registration Bureau.

The National Registration Bureau (NRB) is responsible for collecting biometric and biographic information and issuing National IDs (NIDs). The NRB also operates the Automated Fingerprint Identification System that checks for duplicate or multiple registrations.

The Kenyan NID is mandatory and must be acquired when an individual turns 18, and is issued free of charge. The Kenyan NID does not have an expiration date. Thus far, Kenya has issued 24 million cards, but this total may include duplicates as well as the inactive cards of deceased individuals. There are about 1.2 million new registrations each year. Foreigners who remain in Kenya more than 90 days are required to register as an alien and get an alien registration card.

Every citizen in Kenya not previously registered has to go through the first category which is the initial registration of applying for an identity card. At this stage, no fee is paid to access this service. In Duplicates – resulting from lost, defaced or mutilated cards. National Registration Bureau charges a service fee of Kshs.100 with effect from 16th March 2018 for replacement and change of particulars resulting from a change of name(s) and residence which attracts a fee of Kshs.300 and Kshs 1,000 (depending on the request).

The requirement needs for the first stage of ID application by Kenyan citizens include a birth certificate or baptism certificate, both parents identity cards and copy, two passport size photos and a school leaving certificate.

Huduma Number

On 19th September, 2005, the Head of Public Service appointed an Inter-Ministerial Taskforce on Integration of Population Register Systems (IPRS) in line with the National Economic and Social Council (NESC) recommendation on the fast-tracking of the integration of the registration systems. The Taskforce made several recommendations one of them was the introduction of a unique national number – Personal Identity Number (PIN) for all individuals resident in the country. That the number be assigned at birth for all residents and serve as the control number for all registration systems, Establishment of a National Population Register, containing information of all residents and serve as a central reference for all population registration systems, a central database. Development of nationwide ICT infrastructure backbone to link government agencies for purpose of information sharing and verification.


According to  
Kenya Law Reform Commission, the recommendations of this taskforce formed the basis for the formation of the Integrated Population Register System (IPRS) to serve as the single source of truth for the population data in the country. Although IPRS was a good step towards the integration of population data, it was limited in capacity since it only consolidated data from primary population registration agencies, these being Civil Registration Department (CRD), National Registration Bureau (NRB) and Department of Immigration Services (DIS), which are established by different legal regimes. Further, IPRS did not seek to validate the information received from primary agencies by getting information from the source, Kenyans. There were a number of shortcomings of IPRS hence the Government took up the challenge. In order to improve and build upon the progress made by IPRS, the Government initiated the  National Integrated Identity Management system ( NIIMS) programme under Executive Order No. 1 of 2018. NIIMS was subsequently approved by the National Assembly vide the Statute (Miscellaneous Amendments) Act, No 19 of 2018.

The purpose of NIIMS project is to create and manage a central master population database, which will be the ‘single source of truth’ on a person’s identity since it will contain information of all Kenyan citizens and foreign nationals residing in Kenya and will serve as a reference point for personal data for Ministries, Departments and Agencies (MDAs) and other approved stakeholders. NIIMS involves registration of all Kenyans both locally and abroad and also all foreign nationals who live in Kenya. Upon registration, the enrolled persons will be issued with a unique identification number referred to as Huduma Namba and later a multi-purpose card referred to as Huduma card, which will substitute the current inefficient identity cards. The Huduma Namba, being a unique identification number, will be used to identify all persons in the country and thus will be used while accessing government services and identification both by government and the private sector. It will waive the need for issuance of multiple registrations of the same person and will be used from cradle to death. NIIMS will be the single source of foundational data about a person and all government agencies will tap into it. The Huduma card will contain the integrated personal and foundational data of the cardholder. The mass registration for Huduma Namba began in March 14th 2019.

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Juliet Atellah is a data journalist based in Nairobi, Kenya

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Kenya Transactions in FinCEN Files Raise Suspicions Around Coffee and Ivory Trade

Twenty-four Kenyan financial institutions were named in the reports as either beneficiaries’ banks or banks through which companies and individuals made suspicious payments from countries that include the United Arab Emirates, Nigeria, the United Kingdom, British Virgin Islands and China.

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At least 53 Kenyan companies and individuals appear in a leak of banking records submitted to the US Department of Treasury as suspicious financial activity, according to an analysis of leaked bank documents by Africa Uncensored.

The documents, submitted by some of the world’s largest banks to the US Department of Treasury’s Financial Crimes Enforcement Network, also known as FinCEN, were obtained by BuzzFeed NewsBuzzFeed News shared the documents with the International Consortium of Investigative Journalists (ICIJ) which coordinated 110 media partners around the world.

The size of the leak, 2,100 suspicious activity reports filed by U.S. banks, or SARs, is unprecedented.  While the documents are not evidence of wrongdoing, they provide a unique, bird’s-eye view of global illicit money flows often obtained through corruption and other crimes.

What is a SAR?
Twenty-four Kenyan financial institutions were named in the reports as either beneficiaries’ banks or banks through which companies and individuals made suspicious payments from countries that include the United Arab Emirates, Nigeria, the United Kingdom, British Virgin Islands and China.

“Banks are at the heart of the finance industry. Both legitimate and illegitimate finance moves through financial institutions. Big money is not carried in suitcases but through very respectable banks and other international financial institutions”, says Alvin Musioma, executive director of Tax Justice Network Africa.

Additional reporting by Africa Uncensored also linked shareholders of Commercial Bank of Africa — now named NCBA Group — which is co-owned by Kenya’s first family, to a company that received millions of US dollars in potentially suspicious payments for coffee and DVD players.

The Coffee Case

The New York branch of Standard Chartered, which acted as an intermediary bank, flagged payments sent to a company called SMS Ltd which the bank identified as having addresses in Kenya, Afghanistan, Uzbekistan, Russia and Bulgaria.

In the reports, the bank described SMS Ltd as being “in [the] pharmaceutical and medical products” industry. However, the bank noted, the companies sending the payments were in completely different lines of businesses, including commodities trading, vegetable oil production, and coffee exports.

Of the $14 million that SMS Ltd received between 2005 and 2013, $3.3 million was paid by Kenyan entities. More than $2 million of that was from two coffee Kenyan dealers, East African Gourmet Coffees Ltd and Servicoff Ltd. In fact, the companies are connected to each other and share company officers with companies linked to the Kenyatta family.

According to company registration documents, East African Gourmet Coffees’ directors include an obscure company with no online presence, New Start Nominee Limited, and two individuals, Kibet Torut and Peter Kimathi Kinyua, who also owns Servicoff Ltd.

One of the shareholders of Servicoff Ltd is  Ropat Nominees Ltd, the second-largest shareholder of NCBA Group, co-owned by President Kenyatta’s family via their company Enke Investments Limited.

The two Ropat Nominees’ directors co-own other companies, including one with John Stuart Armitage, who appears in numerous companies owned by Kenya’s first family. The company, Southbrook Holdings, was recently at the centre of a contentious land sale deal involving the president’s mother.

Contacted by journalists, Peter Kimathi Kinyua said that Servicoff Ltd’s payments to SMS Ltd (registered in Kenya as Sustainable Management Services Limited) have been for the purchase of coffee. He declined to comment on the involvement of Ropat Nominees Ltd except to confirm that the company is part of the nominee shareholders.

“We normally deal with SMS – Sustainable Management Services, a coffee marketing agent at Nairobi Coffee Exchange,” said Kibet Torut while denying knowledge of SMS Ltd and the transactions quoted from the suspicious activity report, in an email response.

Kinyua was appointed by President Uhuru Kenyatta as board chairman for Kenya Forest Service in 2018.

Both Kinyua and Kibet Torut denied having any business ties to the president.

According to their website, Servicoff Ltd, has been growing, processing roasting and blending coffee since 1969. The company shares an email domain name with East African Gourmet Coffees Ltd, the other coffee dealer named in the bank’s report.

Import records confirm that Servicoff has been shipping Washed Kenya Arabica AA coffee since 2007, mainly to the U.S.

The bank report also noted that SMS Ltd had received $1.3 million from Louis Dreyfus Commodities Kenya, listed as a commodity broker in the SAR, the local branch of a global trade firm headquartered in Switzerland that deals in the coffee business too. Africa Uncensored has identified that one of the directors behind the Nairobi branch of Louis Dreyfus is Alexander Mareka Dietz, who is also a director in a company with Udi Mareka Gecaga, a one-time brother-in-law to President Kenyatta.

Reporters were unable to reach Dietz, and automated replies to emails sent to the company address indicate that only approved senders are able to email the company.

Company records obtained by Africa Uncensored reveal that Sustainable Management Services (SMS) Limited is wholly owned by East Africa MM Co. LLC, which is registered in the US state of Delaware, a recognised haven for shell companies due to its reputation for corporate secrecy and tax breaks.

On a US coffee seller’s website, SMS Ltd markets Kenya AA coffee that is handpicked by many small-holding farmers in central Kenya.

According to the Kenya Biogas program website, the company is “one of the partners working with coffee farmers through targeted capacity building on climate change through projects.”

A snapshot of their website in 2016 reveals that SMS Ltd is a group company of Ecom Agro-Industrial Corporation Limited, which is registered in Switzerland with the Esteve family its ultimate beneficial owner. Ecom’s website lists an office at Tatu City coffee park in Ruiru, Kenya where SMS Ltd is located, according to its Facebook page. [3] The Esteve family also runs ECOM Coffee, a leading global coffee miller and coffee trader.

Screenshot of ECOM’s website

Screenshot of ECOM’s website

Screenshot of Sustainable Management Services Ltd’s Facebook page

Screenshot of Sustainable Management Services Ltd’s Facebook page

However, according to the FinCEN files, of the 201 transactions SMS Ltd received totalling over $14 million, more than half came from a Dubai-based vegetable oils production company for the purchase of television and DVD player.

When asked by journalists to comment on why a Kenyan company with a Delaware-registered shareholder markets coffee from Kenyan farmers to Kenyan companies exporting to the US, Musioma, the Tax Justice Network Africa executive director, had this to say:

“The fact that we are talking of companies being registered in tax havens and coming in, speaks of the lax laws we have when it comes to beneficial ownership. You might find that there is a conflict of interest here emanating from the directors of these companies being the ones that are involved in those transactions”.

Reporters were unable to reach SMS Ltd. Emails to the parent company in Switzerland went unanswered.

Victoria Commercial Bank and Middle East Bank (MEB) Kenya Ltd did not respond to questions concerning these transactions, some of which were processed by the banks.

Standard Chartered Bank, whose New York branch filed the suspicious activity report, did not respond in time for publication.

“No More Bullshit”

In another set of transactions in a separate suspicious activity report reviewed by Africa Uncensored, a would-be fashionista named Joyce Oweya Anyumba — a 33-year-old with addresses in Buruburu, Nairobi, and Mombasa — held an account with the Barclays Bank of Kenya from 2015.

Her industry included interior design, curio and African wear, according to Barclays’ report.

However, between July 2015 and October 2016, the account sent and received about 63 wire transfers totalling to $197,094.51. Anyumba received funds from banks in Qatar, the US, Australia, China, Germany and Sweden; she also wired a total of $1234.45 in small payments to individuals in the US, Australia, Canada, Sweden, China and Singapore that the bank could not verify.

The transactions were flagged by the bank because of unidentified sources of funds, unclear economic purposes of the transactions, and potentially being third-party payments.

The justifications for the payments included descriptions such as “bill settlement”, “construction of house” and “consultation fees”, according to the bank’s report.

Other payment details included “government first payment”, “gift finalization of matters discussed”, and “supplier invoice payment to be forwarded”.

One sender from Australia made 13 transfers worth almost $12,000 to Anyumba within a year. The payment details included the mysterious notes: “supplier invoice the money better come back” and “supplier invoice make good on your promise no ivor no more bullshit.” The bank noted in its report: “ivor probably meaning ivory.”

Anyumba denied knowledge of these transactions in an email.

“Am sorry sir, I don’t know what you’re talking about,” said Anyumba when we asked her to confirm the above transactions. She did not reply to our follow up emails on her age, address and whether she is in the business of selling clothes and interior design materials.

There is no legal trade in ivory in Kenya, according to Dr Richard Thomas, the head of communications for TRAFFIC, a UK-based wildlife trade monitoring organisation. “It doesn’t come as any surprise to hear you say there’s essentially no record of [the parties]”, Thomas told reporters.

“Wildlife is like any other commodity that’s traded: there’s buyers and sellers and money changes hands. International commercial ivory trade is banned under CITES, but the trafficking of it takes place, run by largely Asia-based organised criminal syndicates. One effective strategy to targeting such networks is through following the money”, said Thomas.

Other senders of money to Anyumba include an American man with a history of shoplifting and bankruptcy, according to the bank’s suspicious activity report.

The account was expected to have an annual turnover of about 16 million Kenya shillings ($160,000), according to Barclays, but the customer received significant transactions whose real economic purposes could not be identified.

“Barclays Kenya has filed a SAR on Anyumba with their local regulator and is in the process of exiting the relationship,” the report noted.

The Kenya branch of Barclays Bank — now known as ABSA Bank Kenya PLC — had not answered our questions regarding the specifics of the transactions by the time of publication.

Musioma listed some general concerns of suspicious trade through Kenya because the country serves as a hub for drug smuggling and illicit trade in all kinds of goods, including ivory and smuggled minerals.

“All these monies are not carried in suitcases or wheelbarrows. The banking sector is at the centre of it. And I don’t think that both the Central Bank and regulators are doing enough to stretch banks in terms of punitive measures,”  said Musioma.

Many of the transactions flagged as suspicious by banks in the FinCEN Files involve recipients and originators from Kenya and other high-risk jurisdictions, including Cyprus, Mauritius, Moldova, Latvia, Afghanistan, Russia and Turkey.

Musioma likened banks to providers of “getaway cars” in crime and corruption in the country — the so-called intermediaries in terms of them providing the oil to enable corruption. “So, the fight against corruption, illicit financial flows and money laundering and all these other crimes can never be won without bringing in the central role banks play”.

Much more could be done to address the role of Kenyan banks in money laundering and other financial crimes, according to Musioma. For example, increasing the punishment for banks who break regulations designed to prevent illicit flows, improve due diligence in the banks’ compliance procedures, and address the issue of the revolving door.“ We have seen people moving in from the banking sector to become regulators and that will create a conflict of interest in the banking industry,” he said.

With Kenya working on being a regional financial centre, through the Nairobi International Finance Centre (NIFC) the regulation and enforcement of the financial sector must be tightened, the tax expert concluded.

Additional reporting by Juliet Atellah, data journalist at The Elephant.

John-Allan Namu, Martha Mendoza of AP and Kira Zalan of OCCRP contributed to this article.

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COVID-19: Why It Might Get Difficult to Access Bank Loans

Local banks are seeing a growing percentage of their borrowers falling behind or ceasing making payments on their loans. This is making it increasingly difficult for these lenders to issue new loans at a time when struggling businesses need all the help they can get.

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COVID-19: Why It Might Get Difficult to Access Bank Loans
Photo: Unsplash/Daniel Thiele
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Small businesses account for the vast majority of employment and job growth in the Kenyan economy. But these firms have been disproportionately impacted by the COVID-19 pandemic and are now facing a credit crunch.

Local banks are seeing a growing percentage of loans fall into the “non-performing” category – meaning that borrowers have fallen behind or ceased making payments.

This is making it increasingly difficult for these lenders to issue new loans at a time when struggling businesses need all the help they can get.

According to the KNBS Economic Survey, the informal sector provided approximately 83% of total employment in the country and created 91% of the new jobs last year.

The Capital Markets Authority (CMA) estimates that 86% of the total demand for the Small and Medium Enterprises’ (SMEs) funds is obtained from bank financing.

As such, most banks in Kenya have tailored loan products targeting these SMEs.

The demand highlighted above led to the launch of an unsecured loan, Stawi, by the Central Bank of Kenya (CBK) in collaboration with five other banks, targeting SMEs. However COVID-19 pandemic has posed challenges to these efforts.

The measures put in place to contain the spread of the pandemic such as restricted movement and curfews have impaired the operations of SMEs. This has, in turn, negatively impacted revenue streams for many. This poses a challenge to banks who have heavily  lent to these businesses. When the affected SMEs cannot repay their loans, it   impacts the bank’s loan portfolio whose quality is dictated by the creditworthiness of the borrowers.

This article focuses on examining the loan quality of local banks during this pandemic period by analyzing their non-performing loans. The loan portfolio quality is an extremely important component of a bank’s profile because loans are considered an asset out of which a bank produces the bulk of its profits.

A bank that is able to maintain satisfactory quality will make sufficient profits to generate capital for expansion. However, not all of a bank’s customers will pay back what they borrowed. Some will make repayments for a period of time and then default on the full payment of interest and principal.  In a nutshell, Non-Performing Loans (NPL) represent loans in which the interest or principal is more than 90 days overdue.

We analyse the banks’ loan portfolio quality between the first quarter of 2019 and the second quarter of 2020 for three publicly listed banks that are offering the Stawi loan product, namely: KCB, Co-operative Bank (Co-op) and Diamond Trust Bank (DTB).

Non-Performing Loans (NPL) Ratio

The loan portfolio quality of banks is measured by their NPL ratio -the amount of non-performing loans as a proportion of the total loans issued to customers;  popularly known as the banks’ loan book.

The ratio reveals the extent to which a bank has lent money to borrowers who are not paying it back.

COVID-19: Why It Might Get Difficult to Access Bank Loans
Both KCB and Co-operative Bank experienced an increased NPL ratio between the first and second quarters of 2020. This indicates a deteriorating loan portfolio quality within the period that SMEs’ revenue generation streams have been strained due to the measures put in place to contain the COVID 19 pandemic.

Indeed, KCB moved from an NPL ratio of 7 % to an NPL ratio of 10% during the pandemic; meaning they were losing 3 more shillings for every 100 shillings they issued as loans to defaulting borrowers.

COVID-19: Why It Might Get Difficult to Access Bank LoansA look at the rate of growth of the loan portfolio in the chart above reveals that the three banks experienced a sharp dip in the amount in loans they advanced to their respective customers. This shows that banks shied away from issuing more loans to their customers within the period the pandemic peaked.

“Borrowers rushed to seek moratoriums on their loan repayment. For banks, this is a loss of interest income, while it’s crucial so as to avoid these loans [from] falling into the NPL category which would reduce profits through provisions,” CPA Alex Muikamba, a financial expert affirms.

Interest Income versus Non-Performing Loans

Since margins on bank loans are usually low, the complete loss of a single non-performing loan can wipe out the profits generated from dozens of performing loans. We now compare the interest income from the loans with the amount of Non-Performing loans.

COVID-19: Why It Might Get Difficult to Access Bank Loans

COVID-19: Why It Might Get Difficult to Access Bank Loans

COVID-19: Why It Might Get Difficult to Access Bank Loans
It is observed that the total non-performing loans exceeded the interest income from loans and advances in most quarters for the three banks.

When loans are classified as non-performing, banks are compelled to stop accruing interest on those assets. This implies that their net interest income will fall as their funding costs remain unchanged.

Loan-Loss Provisions

Banks usually set aside an allowance for uncollected loans from customers to cover for any losses that may be occasioned by the Non-Performing loans.  This allowance is referred to as the loan-loss provisioning.

During the peak period of the pandemic in the second quarter of 2020, banks are seen to have increased their loan-loss provisioning in response to the declining loan portfolio so as to remedy the situation before it gets out of hand. The KCB increased their loan loss provisioning to a greater extent as compared to the other two banks that were analyzed. This is because of the higher increase in its non-performing loans as observed in the sharp rise of its NPL ratio.

COVID-19: Why It Might Get Difficult to Access Bank LoansThese increased provisioning costs will be charged against operating income and will fall through to the bottom line, reducing net income attributable to shareholders.

As uncertainty surrounds the time it will take for the economy to recover from the effects of the pandemic, so is the recovery of affected SMEs borrowers.

What happens to the Non-Performing Loans though?

Muikamba suggests that to mitigate NPLs, banks will have to restructure the loans to make it easier for borrowers to repay by extending the loan terms and hence reducing the instalment.

In a circular on the measures to mitigate the adverse impact of COVID-19 on loans and advances, the CBK recommended loan restructuring where a bank may negotiate with the borrower to work out revised terms to enable the borrower to make payment under more relaxed terms. This relief, however, was granted only to those borrowers whose loans were performing as at 2nd March 2020. For borrowers who were already struggling to make their repayments, they would have to contend with foreclosure which involves the recovery of any collateral used to secure the loan.

For unsecured loans, banks would be obliged to write-off the loans by removing them from their balance sheet.

In the extreme event where write-offs exceed existing loan-loss reserves and available profits from other sources, shareholders’ equity will have to be written down.

This would in turn affect capital levels which could necessitate new funding to ensure the banks meet the regulatory minimum capital requirements. The banks could also strengthen their capital levels by reducing loan growth so as to shrink its loan portfolio. In such a scenario, it would mean that you would have a difficult time accessing a bank loan.


Additional contribution by Purity Mukami. This article was first published by Africa Uncensored’s Piga Firimbi.

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COVID-19: Regulatory Measures Could Widen Kenya’s Financial Access Gap

If the new regulations by the Central Bank of Kenya put microfinance institutions under stress, low-income households’ will be unable to access credit, and their ability to maintain livelihoods will be affected.

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Kenya’s financial inclusion has drastically improved in the last couple of years through development in the financial sector. Mobile money has been a key driver in narrowing the financial access gap in Kenya.

According to FSD Kenya, M-Pesa, Safaricom’s mobile money platform, is said to have lifted 2% of Kenyans out of poverty.

The impact is more significant in female-headed households, which had previously been limited in accessing financial services due to cultural restrictions. Financial access growth has reduced the gender gap from 13% to 6%.

Source: 2019 FinAccess Household Survey

Source: 2019 FinAccess Household Survey

Mobile money has been the main financial service used by all socio-economic groups in Kenya. It has prompted the entrance of several private investors into Kenya’s credit market as the demand for quick, small loans has been growing rapidly. In the first quarter of 2020, loan accounts in Kenya increased by 21% compared to the last quarter of 2019. About 92% of these accounts were mobile loans. Another common source of finance for Kenyans, especially the lower-income groups has been chamas. These groups offer loans to members at about 1% per month.  Mobile loans and chamas have been falling through the cracks of formal lending systems, providing the lower-income groups with capital to pay school fees, do farming, expand their businesses and meet daily expenses.

Reasons for taking credit

Source: 2016 FinAccess Household Survey

Source: 2016 FinAccess Household Survey

Financial options for the poor are falling flat…

The financial services used by Kenya’s most vulnerable groups are mobile money, informal groups, banks, insurance (mostly NHIF) and digital loans.

Source: 2019 FinAccess Household Survey

Source: 2019 FinAccess Household Survey

Luckily, the low-income groups can still comfortably use mobile money, especially since the Central bank extended the waiver of M-pesa fees for transactions equal to or below Kshs 1,000. However, they are unable to access mobile loans. In April, when the Central Bank of Kenya barred mobile lenders from forwarding the names of loan defaulters to credit reference bureaus (CRBs) and stopped the blacklisting of borrowers owing less than Kshs 1,000, most mobile loan companies ceased loan disbursements and focused on getting repayments from the funds disbursed pre-COVID-19.

Usually, SACCO customers are mainly denied credit on account of failure to clear outstanding loans. Mobile money, mobile banking and digital loan apps providers deny customers credit on a bad or no credit history. Lower-income groups are the majority who make up Kenya’s informal sector or part-time workers in the formal sector who were the first to be culled from the workforce because of the economic impact of COVID-19. Many have been unable to repay their loans, and financial institutions are avoiding taking up more risks by lending to this consumer segment.

Reasons for being denied credit by the institution in 2019

Source: 2019 FinAccess Household Survey

Source: 2019 FinAccess Household Survey

Low-income groups lack the financial cushion of adequate savings and have had to find new ways to survive

For those using informal groups to access finance, the main reason for being denied credit is usually low savings. In the first few weeks of the COVID-19 outbreak in Kenya, low-income groups depleted their savings, and now members of these informal groups are unable to raise their monthly contributions.

As financial services appear to have fallen flat, Kenya’s low-income groups have resorted to selling their assets, skipping meals, looking for a new start in their rural homes, amongst other measures they are taking to survive.

Microfinance institutions and mobile loan companies now face threats to their own existence. These institutions do not have a fall back market, as they rely solely on their shareholders or depositors. The commercial nature of these companies puts a heavy amount of pressure on borrowers who pay very high annualised interest rates of over 130%. If left unregulated, these players can end up increasing poverty. Some households have reported being much more afraid of their inability to repay their debt to these institutions than they are of the coronavirus.The Central Bank has stepped in to help borrowers by supervising digital lending for the first time. It has proposed a law that will see it regulate monthly interest charged by the mobile loan companies and borrowers’ non-performing loans.

Whereas the new regulations would protect borrowers, there’s another side to the coin. If the new regulations by the Central Bank of Kenya put microfinance institutions under stress, low-income households’ will be unable to access credit, and their ability to maintain livelihoods will be affected. There needs to be a delicate balance of measures put in place through a collaborative effort between international donors, financial institutions and the government. Stakeholders need to not only create adequate consumer protection legislation but also implement measures that will sustain microloan services to Kenya’s most vulnerable.

This article was first published by Africa Uncensored’s Piga Firimbi.

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