DDP 762. Jay K. Rosengard, Ashok S. Rai, Aleke Dondo and Henry O. Oketch. "Microfinance Development in Kenya: K-Rep’s Transition From NGO to Diversified Holding Company and Commercial Bank." June 2000. 37 pp.

The Kenya Rural Enterprise Programme (K-Rep), established in 1984, is one of the most innovative and successful microfinance schemes in Africa. It provides financial services to microenterprises excluded from the formal financial sector, thereby generating income and employment opportunities for low-income microentrepreneurs. K-Rep made 11,582 loans totaling KSh 347 million (approximately US$5.9 million) in 1998.

K-Rep is in the process of institutional reorganization and diversification: it has changed its name to K-Rep Holdings Limited; split its commercial banking operations from its research and advisory services, creating K-Rep Bank; received a banking license in March 1999; and secured share capital in K-Rep Bank.

The transition from a microfinance NGO into two complementary institutions, one a commercial bank and the other a non-profit R&D and advisory organization, is an extremely challenging process to manage. This study is designed to facilitate K-Rep’s transition by combining a comparative perspective from microfinance institutions in other countries with K-Rep’s considerable research and extensive strategic planning to date.

The creation of K-Rep Bank raises two key strategic issues: 1) How might K-Rep Bank’s need to be commercially viable and institutionally self-sustaining affect its current microbanking mission and market niche? 2) What are the potential complementarities and contradictions in the missions of K-Rep Bank and K-Rep Holdings Ltd.?

The creation of K-Rep Bank also raises four critical operational issues: 1) How will K-Rep Bank mobilize voluntary savings, and what will be the relationship between voluntary and mandatory savings? 2) How can K-Rep Bank improve the efficiency while maintain the quality of its lending operations? 3) How can K-Rep Bank ensure sustainability? 4) What will be the relationship between K-Rep Bank operations and the microbanking operations of K-Rep Holdings Ltd.?

Issuance of K-Rep’s banking license raises regulation and supervision issues in three key areas related to Central Bank of Kenya (CBK) oversight of microfinance in Kenya: 1) regulation and supervision of K-Rep; 2) regulation and supervision of other potential microfinance banks; and 3) regulation and supervision of non-bank microfinance institutions. In each of these areas, the concerns are the same regarding the efficient and effective prudential regulation and supervision of microfinance banks in Kenya: 1) Are the CBK’s commercial banking statutory requirements and prudential norms and regulations appropriate for microfinance banks? 2) Can the CBK monitor and enforce these provisions in a cost-effective manner for microfinance banks?

Keywords: Kenya, microfinance, micro banking, banking regulation, institutional transformation, informal sector, poverty alleviation

JEL Codes: E58, G21, G28, N27, N87

Jay K. Rosengard is Coordinator of the Financial Sector Program at the Harvard Institute for International Development.

Ashok S. Rai is an Institute Associate at the Harvard Institute for International Development.

Aleke Dondo is the Managing Director of K-Rep Holdings Ltd.

Henry O. Oketch Henry O. Oketch

This report was prepared under the Equity and Growth through Economic Research/Public Strategies for Growth and Equity Cooperative Agreement No. AOT-0546-A-00-5133-00 of the Division of Strategic Analysis, Office of Sustainable Development, Bureau for Africa, U.S. Agency for International Development (USAID). Views and interpretations in this paper are those of the authors and do not necessarily reflect the view of the U.S. Agency for International Development.