September 20th, 2016

Financial institutions play a key role in enhancing trust in the financial system

“I have seen many people’s properties auctioned by banks, some of whom have committed suicide due to difficulties in meeting their loan repayments. I wouldn’t dare take a loan, just the thought of committing suicide scares me.” Agnes’ words sharply contrasted with the beautiful, clear Machakos sky. This particular “Field Friday” event took us to the fairly cosmopolitan, bustling town surrounded by hilly terrain, 63 kilometres southeast of Nairobi.

Agnes, in her late forties, has owned and run a small retail shop for several years at the Machakos bus terminus. Her utterances made us reflect on how consumers of financial solutions in Kenya tend to enter contractual agreements with financial institutions without fully understanding their obligations. Her statement pointed to low levels of trust in the Kenyan financial system by the common mwananchi (citizen). We set out to engage with the people of Machakos town to better understand their access to financial information and the bearing that this has on their decision making.

Joan, a lawyer based in Machakos town, pointed out that most of the problems were as a result of banks not giving full disclosure on the various financial products they offer. She frequently handles cases of bank repossessions and insurance companies not honouring their contractual obligations.  She contrasts bank financing to SACCOs, which by tradition tend to charge no more than 1% interest per month for any facility. “After seeing the problems faced by bank customers when they are unable to pay, and lack of flexibility by banks, I chose to stick with a SACCO for credit”. Insurance companies are also to blame: “I was promised to receive a bonus pay out on the fourth year after making regular payments to my insurance savings plan. I am yet to receive the payment and they have never issued me with an account statement.”

Digital financial services are not exempt

As we made our way through the busy streets we met Morris, a newspaper vendor who was all too enthusiastic to talk to us. “Niko tayari kuongea na nyinyi, semeni tu kile mnataka kuelezewa.” (I am ready to talk to you, just say what you want to know), he said with a broad smile. Morris informed us that he uses M-Pesa quite regularly and believed that he doesn’t incur any charges to send money but rather the person receiving the money would incur the charges (This is, however, not the case as M-Pesa charges both the sender for the transfer of funds and the receiver for the withdrawal of funds into cash. He also had the impression that it would cost him KShs. 55 to withdraw KShs. 1000 from an M-Pesa agent when in reality it costs KShs. 27. This case either demonstrates that people lack accurate information on the costs of financial services, or that they may be indifferent to them. The latter is the case for Daniel, a boda boda (motorcycle taxi) operator, who makes his daily rental payments of KShs. 400 to the owner of the motorcycle that he hires. Despite only raking in between KShs. 500 – 1000 a day, he told us that “the transfer fee is insignificant in comparison to the convenience it avails me”.

Some consumers somehow get it

Vincent, a taxi driver for 13 years, was happy to narrate to us of how his bank helped him purchase three vehicles over the years. “My bank has always been transparent on the charges for the facilities I have taken. I remember that I was charged 12% per annum for the first facility that I took. I have never incurred charges that had not been disclosed beforehand and I am very pleased with my bank”. However, when we asked Vincent whether he was being charged at a flat rate or on a reducing balance he had no clue of what we were talking about.

A group of boda boda operators informed us that although they knew the amount and number of repayments to be made for their loans, they had no idea of the rates they were being charged. “We meet regularly as a savings group with our bank relationship officer. He takes advantage of our meetings to present our statement of accounts in addition to providing financial management advice,” one driver said.

As we left Machakos town, we reflected upon Agnes’ story of lives ruined as a result of not understanding the terms of financial solutions they obtained. It was clear to us that financial institutions play a key role in enhancing trust in the financial system. In this case, due to a lack of trust, Agnes chose to avoid growth opportunities offered by formal finance and instead to run a small steady-state shop in the heart of Machakos town for twenty years. How many similar stories of stunted growth and missed opportunities have been experienced in Kenya as a result of lack of transparency in finance?

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