Posts Tagged ‘chama’

Bridging East Africa’ formal – informal financial services divide

Kenya’s formal inclusion looks pretty, the financial inclusion industry has been has been great at talking up its achievements over the past 10 years. Here, 75.3% of Kenyans are now formally included, a 50.3% increase from 19 years ago. Official statistics on mobile phone penetration is up to 80.5% of the population and there is general consensus, the mobile phone has been central to expanding formal financial services to the – unbanked and under banked. The numbers are pretty awesome.

In February, FSD Kenya’s chart of the week featured an interesting pattern.

 

source: http://fsdkenya.org/data-visualization/chart-of-the-week-credit-in-kenya-how-big-are-loans-on-average/

source: http://fsdkenya.org/data-visualization/chart-of-the-week-credit-in-kenya-how-big-are-loans-on-average/

 

The red line marks the axis between the formal (prudential) and informal financial services alternatives. The largest source of credit for the bottom 40% populate the informal segment – SACCOs ,MFIs, Peer to peer, community groups. Dotting the top in blue are the banks and mobile banking lending products Mshwari.

So, there is more going on besides what the numbers say about formal financial inclusion.

 

Appreciating the informal sector’s financing alternatives

I got a sense of this gap between what the reports say and what was on the ground in 2015/2016 as part of 2 immersive fieldwork projects – Nyeri Mama’s Financial Diaries and later same year as part of Borderland Biashara: Mapping the cross border, national and regional trade in the East African informal economy project. I got to meet and spend time with biashara people, mama biashara, informal traders at the borderlands, boda boda guys, brokers and 65 year old Wangari – all in their natural setting – the mostly rural and cash intensive informal economies at the borderlands.

I found out that 90% of them had a basket of alternative credit, investment, insurance and savings informal financial products at their disposal – up to 8 different volatility management groups. The flavor of these alternatives ranged from extreme formal prudential to extreme informal.

Wangari, from Nyeri, for example, did not have a bank account but, was part of

  • 1 Micro-finance bank,
  • 2 Cooperatives
  • 1 ROSCA (Rotating Savings and Credit Association
  • 1 Chama (savings group)
  • a Catholic church group and
  • a modest Nokia mobile phone with Mobile wallet (Mpesa) and mobile wallet bank (Mshwari)

At the borderlands of Busia and Malaba between Kenya and Uganda, close to 96% of 100 biashara interviewees were part of at least 3 savings groups, besides their mobile phone. There was almost always one savings group that was part of their trade or craft networks.

 

Bridging the Gap

system-monster

When we look at the under banked strictly through the lenses of a bank, we miss out on the rich diversity of community bank-like products at their disposal. When their options are labelled informal, the tone becomes one of expanding the larger banking formal system, at the expense of our dear Chamas.

My suggestion for the present day efforts to push towards financial formalization, is to instead transform into a pull towards formality. Is there a middle ground? Where we can have the rich of the Chamas and savings group together with the formal financial system? Or where we can have a blend of the rich of the savings groups with technology?

Yes, we can, and there are examples from East Africa’s Kenya and West Africa’s Chad

  • Equity bank directly engages registered savings groups at the Busia Malaba border, a trader’s Chama.  A credit officer from a local branch attends weekly meetings with the group, and liaises between Equity Bank and the Chama. The bank facilitates loans guaranteed by the group as a unit. 

“Muranga county seeks to ease unemployment with cow loans”Daily Nation

  • Ng’ombe loan, by Muramati and Unaitas SACCO, was an unconventional loan product much closer to the realities of a rural Muranga. Youth in this county received high-yielding, pregnant dairy cows on credit, and were to repay the loan through milk deliveries to processors. An expectant cow as the loan principal, with repayments priced in daily milk deliveries. How cool!

“TigoPaare – People’s Banks for Communities across Africa”Balancing Act Africa

  • In Chad, Paare are the equivalent of Chama group savings plans in East Africa. TigoPaare is a group wallet that adds a ‘group layer’ on top of standard mobile money, to deal with common funds, trust and other group initiatives. The wallet helps informal cattle trades look after their income from cattle sales, with the functionality to make loans to members. The pilot attracted 19,000 users, including community mutual funds, cotton producers cooperatives, churches, market sellers and women’s groups.

 

 

Role of Chamas in informal sector entrepreneurialism in Kenya

Researcher Mary Njeri Kinyanjui shares deep insights from Kenya on how social cooperation and collaboration play an important role in the informal entrepreneur’s business financing strategy.

In East Africa, particularly in Kenya, the formation of chama—a Kiswahili word for social group—has helped to enhance group agency and solidarity entrepreneurialism. Individuals collectively and cooperatively form a chama to pool and invest savings for welfare activities, such as paying medical bills or celebrating the birth of a child, as well as for investments, such as buying property, rural land, or plots in the city. The contributions are saved and then given to members on a rotational basis as lump sum loans at low-interest rates. Such business exchanges occur in a free and open market, which discourages hoarding, unfair trading, overpricing, and undercutting.

Here are two stories of Kenyans who have successfully utilized solidarity entrepreneurialism, and chama especially, in informal economies to improve their social and economic wellbeing.

In the 1990s, John, a trader of clothing and accessories, bought his products from wholesalers across Nairobi. However, with the onset of economic liberalization, many of these wholesalers went under, and new suppliers were too expensive. He decided that the only way to sustain his business was to go to China to source his products. With a group of friends, John formed a chama, which was comprised of 10 men, and traveled to China. Together, they made monthly contributions of 10,000 Kenyan shillings (or $108 in today’s dollars). The accumulated wealth was given out as loans, with an interest rate of 10 percent, for hotels and travel expenses in China. Through this initial chama, they have created a revolving fund that facilitates Kenyan traders’ visits to China when demands arise.

In 2011, Jane was invited by a friend to rent a stall to sell clothes in ECT Mall on Taveta Road in Nairobi. She had about $2700 in savings. She spent $325 of her savings to make a down payment and to start her business. After her first earned profit of $485, she was able to renew stock from wholesalers in Kamukunji and also save some money to contribute to her chama. After saving money for five months, she obtained a loan from her chama, which enabled her to buy more stock. And after one year, the traders in her chama made a unanimous decision to use their pooled savings and earnings from loans to buy land in Kitengela. Jane thus moved her clothing business to the plot of land in Kitengela and is now able to maintain her stall with ease because rent, water, and security costs are shared among the traders.

An older article by kiwanja offers an overview of the role played by these indigenous financial cooperatives in Africa, while the chama‘s importance in Kenyan society has already captured the attention of the tech innovators looking to develop mobile solutions.