FSA asset financing: when paying more yields more

October 19th, 2017

A unique, customer-centric approach is quickly growing the customer base of FSAs

This is the second blog in a series about Financial Service Associations (FSAs) and their potential for growth and customer value creation based on an FSD Kenya commissioned survey by BFA. The survey took place in 2017 in Bamba, Kakeani and Mukuyuni and involved in-depth interviews with over 60 respondents including customers, their non-member neighbours and FSA staff.  Read the first blog here: Financial services associations: an imperfect solution

Like most financial intermediaries, FSAs provide credit, savings, and money transfer services in the rural areas in which they are situated. Furthermore, they have the added benefit of providing access to household goods and other assets to their customers who are also the owners of these village banks. “[They] help us get the things we want when we don’t have any money,” said Mary* a member of Mukuyuni FSA, which recently offered its members a chance to acquire water tanks, lamps, and phones.

Of course, members still have to pay but FSAs allow them to pay in installments; a key reason why users prefer them. This provision makes all the difference as Wahida* of Bamba FSA pointed out: “Yes, they have helped me. If it weren’t for the muungano (FSA credit group), I would still be sleeping on the mat.  Now I sleep on a mattress.”

Members often do not have a lump sum to buy what they need so asset finance is a significant part of the FSA loan portfolio and a much-valued service. Members buy a variety of things through their FSAs such as: food, thermal flasks, chairs, mattresses, utensils, iron sheets, water tanks, fertiliser, seeds, solar lamps, phones, and even motorcycles.

However, this isn’t all that makes FSAs unique. Because they are community-based, FSAs offer a unique, customer-centered approach and hence their customer base is growing quickly. FSAs conduct their credit business through muunganos (groups) where members can request the assets they need. This way, the supply responds to the members’ needs.  According to members, FSAs also supply quality products which has built customer trust.

Without the FSAs, members would need to travel long distances at a substantial cost to get the assets they need. Assets and goods bought through the FSAs are delivered to members at the Muungano meeting, the FSA branch, or even at their doorsteps. Customers feel FSA goods are higher quality and are more conveniently obtained, and understand that paying in installments necessitates charging interest. As a result, customers don’t mind paying slightly more for products obtained through the FSA as expressed by Jane*, a 41-year old member of Mukuyuni FSA:

“I would like them to continue doing well, to continue serving their customers well and to bring us good things. In fact, they bring us good things such as thermoses that you can’t find elsewhere.”

When the product in question is food, members don’t feel the FSA rates are a high price to pay. “I decided to take food because I looked and saw that things might go wrong for me during the Christmas season,” said Juma* who is a member of Bamba FSA about a time he didn’t receive the money he expected from his children. “I realised that I needed to buy food so I took rice, beans, oil, wheat flour, and sugar.  The season passed very well. I am proud to be a member”; he added. Similarly, Faith* also considered the interest she paid for food at the FSA to be negligible because without it, she could have starved.

Based on the interviews, the FSA members and their families have significantly benefited from the assets the FSA provided.  This view was also held by their neighbour non-FSA members who feel that the FSA members had higher standard of living compared to them.  FSA members had better homesteads than their non-FSA member neighbours.  For instance, many had permanent houses built using materials acquired through the FSAs and used solar lamps also obtained from the FSAs.  In addition, they report something more significant: dignity.

However, despite this success, there are a few drawbacks.  FSAs currently don’t have a standard way of procuring assets which creates inefficiency. Currently, each FSA determines its members’ needs and then makes its own procurement arrangements. Collective buying could realise greater gains for both the FSAs and their members.  The FSAs under the K-Rep Fedha Services Ltd management services network, for example, could use a more coordinated approach to achieve greater efficiency through economies of scale.

FSAs could improve their asset financing offer by learning from the successes in Latin America where retailers targeting the poor have introduced banking services to facilitate asset purchases. For instance, Oxxo convenience stores in Mexico are now the largest network of banking outlets in the country.  This suggests that there is a lot of room for growth through asset financing if FSAs can refine and scale their processes.

* Pseudonym used to protect the identities of survey respondents.

1. Read the first blog in this 3-part series: Financial services associations: an imperfect solution

2. To learn, download the full FSA impact report and learn about how FSAs fit a niche that is not covered by formal providers, click here.



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