How has COVID-19 impacted Financial Service Associations?

July 14th, 2021

Restrictions introduced in March 2020 to control the spread of COVID-19 have had a devastating effect on rural livelihoods in Kenya. These measures included a curfew, closure of schools, non-essential businesses and markets and controls on movement across county borders. The Kenyan economy contracted by 5.7% during the second quarter of 2020. The World Bank estimates that COVID-19 has increased poverty rates by 4% and pushed about 2 million Kenyans into poverty.

The impact on the financial sector overall has been mixed. Non-performing loans in the banking sector increased to 13.6% by August 2020, but the crisis resulted in strong growth in mobile money accounts (3.6 million new accounts between April and September 2020). But what about impacts at the grassroots? How have rural, community-level financial institutions and their members been affected? Research carried out with members of the Financial Service Associations (FSAs), a network of member-owned community financial service institutions that provide savings and loan services to their members, shows that the impact has been severe.


The FSA use a group methodology for lending, and their membership is rural, with about two-thirds women. Business or self-employment is the main source of income for the most significant proportion of members (44%), followed by farming (33%), paid employment (10%) and casual labour (9%). The overwhelming majority are active mobile money users, and around 11% own a bank account. Significantly, few FSA members reported receiving remittances from family or friends in the city or any source of government financial support.

When asked about their financial status compared with before COVID restrictions were imposed in March 2020, 71% said it had deteriorated, with 36% reporting that they had sometimes gone without food due to the crisis. For business people, the main causes were a drop in demand due tomarket closures and travel restrictions, and difficulties in sourcing supplies. For farmers, market closures were also identified as the main difficulty. Others mentioned extra costs related to the return of family members to the village from the cities.

“We bought fresh produce, but it got spoilt because the customers were few. Many customers started buying from the farmers as the markets were closed and the goods were cheaper. Many customers to whom we had advanced goods on credit, like teachers and support staff in schools, went to their rural villages. They did not pay.”

– FSA member & market trader, Kilifi County

The most common responses to these difficulties were borrowing money, cutting food expenses and taking goods on credit. An estimated 60% of members were forced to sell assets, primarily livestock, a traditional form of saving.

The FSAs to which these members belonged suffered a knock-on effect from members’ economic difficulties, exacerbated by operational impacts such as the need to suspend group meetings. FSA management and staff worked hard in difficult and anxious times. FSAs innovated by introducing new mobile money channels for loan repayment.  However, loan repayment rates deteriorated due to economic difficulties. While some FSAs relaxed conditions to allow members to repay what they could, others maintained strict repayment conditions, fearful that the volume of long-term bad loans could increase. For similar reasons, FSAs were reluctant to extend new loans to members in difficulty, with the number of new loans disbursed falling considerably. In addition, although members could withdraw voluntary savings, they could not access the compulsory savings that they had accumulated at the FSAs as security for loans. Many of these local financial institutions lacked the flexibility to offer a significant helping hand to their members.

The research highlighted the following lessons for how community-based financial institutions can best support members in times of sudden economic difficulty.

  • Savings need to be accessible. If financial savings are to act as a meaningful buffer when incomes are disrupted, members should be able to withdraw their savings quickly and conveniently. This requires financial institutions to be skilled in asset-liability management to ensure that sufficient liquidity is available when needed. The provision of appropriate savings solutions would enhance the customers’ resilience.
  • In the face of covariant risk such as the COVID-19 crisis, where many members are suffering the same difficulties simultaneously, joint group liability mechanisms can come under strain.
  • Lending institutions need to offer flexibility to clients in difficulty, potentially including repayment grace periods and top up lending. This could entail a short-term financial hit for the institution, with reduced income, increased costs of managing clients and increased lending risk.
  • To help members withstand a crisis, therefore, the financial institution itself needs to be resilient. Institutions need to build up sufficient financial reserves and invest in strong management systems. It is only the strong institutions that are likely to withstand such crises.
  • Using digital channels to disburse loans and collect repayments has benefits in terms of reducing transaction costs and opportunities for fraud. During the COVID-19 crisis, digital channels had an additional benefit of reducing the need for social contact in group meetings and providing an avenue for the FSA business continuity.

The Financial Service Associations (FSAs) are a network of member financed and owned financial institutions structured savings and credit co-operatives but offering Grameen style, group-based microfinance services. Members buy shares in the FSA and participate in joint liability groups through which they can access loans. The FSA network receives oversight, technical services and management support from K-Rep Fedha Services (KFS), a specialist management services company set up by the K-Rep Group in 2005.



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