April 27th, 2020

A big question amidst the current COVID-19 has been, how are community-based finance models fairing? Will community-based finance survive the pandemic? The first COVID-19 in Kenya was reported in mid-March 2020. Two of the cases registered in March were in communities where financial services associations (FSAs) operate, with some of their immediate contacts being FSA members. This created an almost paralysing fear in these communities. The Kenya government’s COVID-19 containment measures which include social distancing and a nationwide 7.00 pm to 5.00 am curfew. More recently, the restriction of travel into and out of Nairobi, the capital city, and the coastal counties of Mombasa, Kwale and Kilifi has multiplied the challenge of doing business in this environment. Many local markets are closed, with only a few larger shops left open. The weekly livestock markets in one of the semi-arid regions where livestock is a key source of livelihoods have also been shut.

FSAs are rural, community-level, member-based semi-formal financial institutions. K-Rep Fedha Services Limited (KFS) has been providing management services and oversight to a network of about 40 FSAs since 2005. The company engages and posts a manager to each FSA who manages the business, supported by a staff team employed by the FSA board.

Membership in FSAs is through purchase of shares. FSAs use the conventional group methodology for lending and thus rely immensely on social capital to extend credit to their customers. Unlike savings and credit cooperatives (SACCOs), FSAs do not use shares as a guarantee for loans but to determine how much one can borrow so as to ensure equitable access to loans. Loan group members guarantee each other’s loans and if one person doesn’t repay, everyone makes up the default through contributions, with loss of the group’s compulsory savings being the last resort. The groups meet in their villages once a month to save, approve loans, and ensure loan repayments. For FSA’s credit operations, social pressure is key to loan repayment.

Most of the loans given by FSAs are for small businesses which are now closed. Furthermore, groups cannot meet, decreasing the effectiveness of group sanctions in maintaining pressure to repay loans. By end of April, less than two months since the first positive case of COVID-19 was reported in Kenya, only about 60% of the outstanding loans were being serviced. FSA borrowers rely on three main sources of income for loan repayment: income generated from small businesses, remittances from family members working in the urban centres, and the sale of farm produce.

With the onset of the COVID-19 pandemic, most small businesses have been closed and remittances diminished as some family members have lost jobs and gone back to their rural homes. In the backdrop of a bumper harvest, households that rely on farm produce seem to be doing better for now. Last year, FSAs embraced customer centricity in how they conduct business. This continues to inform what they do even during the current pandemic. The considerations include rescheduling loans for those economically affected by the pandemic. This will be done on a case by case basis starting next month. In the meantime, FSAs are using moral suasion to ensure that customers who can repay to do so.

Thus far, FSAs do not have liquidity challenges because they have minimised lending. Only emergency loans to meet needs such as medical bills are being disbursed. Other emergency needs would relate to food and education. Fortunately, there was a bumper harvest in most regions of the country in the season that just ended, so there is enough staple food in the communities. Schools remain closed as a result of the pandemic. The FSAs will figure out how to deal with the education loans when they get there. The immediate concern for now is how to keep the business going. Not surprising, very few customers are saving in FSAs and the level of savings withdrawals have significantly increased. While there might be real need for the members to access their savings given the economic disruptions, part of these are panic withdrawals as expressed by one of the FSA shareholders:

“Let me go and stay with my money at home – one can’t tell what will happen next with this CORONA.”

The FSAs are constantly monitoring the impact of the increased savings withdrawal and delayed loan repayments on their liquidity. They might need a loan capital boost to support their members as the economy starts to recover after the pandemic.

Among other measures, the government has been encouraging the use of digital financial services (DFS) to avoid contact and hence minimise the spread of COVID-19. A survey done late 2017 showed that FSA customers had mixed feelings about the use of DFS. While they saw value in use of mobile money to send cash directly to the FSA towards savings and loans repayment, they feared that this would make people not attend meeting and thus group guarantee would lapse.

A couple of FSAs had M-Pesa Paybill numbers which would enable customers to channel their payments directly to the FSA account in a commercial bank, but these were not in much use because FSA members preferred cash. Most FSAs are M-Pesa agents, but their customers cannot send cash directly to these accounts due to restrictions put in place by the provider – they have to visit the FSAs to transact. KFS has now obtained M-Pesa Paybill numbers for most of the FSAs which will make savings and loan repayments easier and safer.  At the moment, the smaller loans can be disbursed through M-Pesa but larger ones would still be disbursed in cash because of the limits.  Most FSA members do not have bank accounts to which the loans could be transferred.

Unlike the FSA services, the M-Pesa agency services are not limited to FSA members only. In the peri-urban regions, FSAs are starting to see people who are not their members seeking M-Pesa cash out services. The attraction is that FSAs have much bigger floats than the small shops in the marketplaces – most of which are now closed. For fear of money laundering practices based on Kenya’s experience, KFS’s guidance is that they should only serve those they know well.

About 80% of FSAs’ members are older women, a significant proportion of whom are either completely illiterate or have basic literacy. This poses as challenge in use of DFS. They mainly use M-Pesa for receiving remittances from their family members working in the towns. KFS estimates that about 40% of their customers are not likely to use DFS as is, even with the ongoing promotion efforts. The team reported that some of the FSA borrowers go to their group officials to request them to send the cash for loan repayment on their behalf.

Another constraint in use of DFS has been the transaction cost. The majority of Kenyans use M-Pesa. Although Safaricom has removed the transaction cost on M-Pesa cash transfers during the Covid-19 crisis, recipients end up cashing out to transact and at a cost. Many micro-enterprise owners have accessed M-Pesa’s mobile overdraft service, Fuliza, on their accounts so do not want to be paid using M-Pesa because Safaricom first recoups the amount they owe. While M-Pesa is anticipated to make a difference, it looks like many rural communities continue to transact in cash. One of the KFS staff observed that,

“There is so much cash circulating in the community, I can’t understand where it is coming from.”

As member-based institutions, FSAs acknowledge the need to come along their customers in this difficult time, and that they are in business for the long haul unlike other financial service providers who could switch to a different customer segment. On the other hand, many FSA members have limited access to financial services outside the FSAs. It looks like the key building blocks are in place to sustain this business relationship, but time will tell if COVID-19 will make or break it.

Felistus Mbole is Senior Advisor for Economic inclusion at FSD Kenya.

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