Rural Financial Services in Kenya: What is Working and Why?

Abstract

Access to rural financial services has a potential to make a difference in agricultural productivity, food security and poverty reduction. However, an efficient, sustainable and widely accessible rural financial system remains a major development challenge in most Sub Sahara African countries. The Economic Recovery Strategy for Wealth and Employment Creation (ERS) has identified poor access to farm credit and financial services as a contributing factor to the decline in agricultural productivity. The Strategy for Revitalizing Agriculture (SRA) proposes to improve access to rural financial services in Kenya. As a follow up on SRA, the Agricultural Sector Co-ordination Unit (ASCU) has fast tracked access to rural financial services by establishing a thematic group on inputs and rural financial services with an overall objective of developing an Integrated Farm Input Strategy. In the late 1990’s, most mainstream commercial banks closed down the rural branches in order to cut costs and improve profits. Since then, a number of non-traditional financial institutions have emerged to fill the gap created by the mainstream banks which locked out low income and irregular earners. This study examines the evolving structure of the rural financial services and the extent to which the current financial institutions have improved access to producers and traders in the rural areas. The study identifies successful cases of functioning financial services in the rural areas. It also identifies constraints that hinder increased access to rural financial services and proposes policy interventions that could make the services more accessible to the rural people. The study was carried out in 15 Districts within six agro-ecological zones. Data was obtained from key rural finance stakeholders using a structured checklist. The study is supplemented with information from the Tegemeo Agricultural Monitoring and Policy Analysis (TAMPA) 2004 survey consisting of responses from 1540 rural households. Findings from the study indicate that a number of key rural financial models have evolved to address the demand for rural financial services in Kenya. These include: Community Owned Rural Financing Models, Private Commercial Bank Led Model, Government Led-Rural Finance Model, Donor Guarantees-Input Supply Model, Managed SACCO-Beach Banking Model and the Informal Group Based Rural Financing Model. The Government on its part has restructured the operations of Agricultural Finance Corporation (AFC) in line with the Strategy for Revitalization of Agriculture (SRA). The emerging leading indigenous banks have also set up fixed and mobile branches in the rural areas.