Financial Inclusion and the Financial Sector Deepening Initiative (FSD) in Kenya
The potential of Inclusive business models to contribute to poverty eradication and sustainable development is well known – and is increasingly gaining attention among governments and policymakers in general. But many inclusive businesses are facing constraints, hindering them to reach a larger scale. They typically include a lack of information, rules, financial resources, and structure and capacity. Inclusive business policies can help overcome these constraints and help businesses to achieve broad impact, as the newly published study “Inclusive Business Policies – How Governments can Engage Companies in Meeting Development Goals” shows.
As part of the study I visited Nairobi in May 2013 to interview some of the main stakeholders involved in designing and implementing policies for financial inclusion; among others FSD Kenya, the research department of the Kenyan Central Bank and the SACCO Societies Regulatory Authority (SASRA). These visits and interviews, together with an extensive document review, give a clear picture of the success factors for policy making aimed at making the financial sector more inclusive:
Success factor 1: An overarching policy framework with a clear vision
Lack of access to financial services is one of the key constraints for lower-income households and small enterprises. In Kenya, the topic is high on the agenda for both policy makers and private actors and covers a broad range of issue areas, such as access to bank accounts, insurance, credit, mobile banking etc. The Kenyan overall long-term policy framework, Vision 2030 recognises the financial sector as a major driving force for national development, and conceives financial inclusion as vital in the production of inclusive growth.
Strategies can be even more effective when they build on an overarching development vision. These frameworks can act as strong coordinating forces, bringing all relevant societal actors together and defining the roles they can play in contributing to shared visions.
Success factor 2: An independent facilitator creating opportunities for dialogue and informal exchange
Kenya´s Vision 2030 was also a driving force for the Financial Sector Deepening Initiative (FSD Kenya). FSD was established in 2005 by the United Kingdom’s Department for International Development (DFID) - a multi-level, multi-actor financial-sector development programme to speed up financial inclusion of society at all levels and in all areas. Informed by a “making markets work for the poor” approach, FSD is an independent facilitator and cooperates with and supports all actors in the financial system - the Central Bank of Kenya , government agencies, private service providers, informal providers, etc. - through research, analysis, advice and the coordination of activities. FSD has a solid and extensive network of links to all relevant people in the country’s financial sector and can easily intermediate between different parties, creating an opportunity for dialogue and informal exchange.
A central facilitator can centralise communication streams to monitor the broader activities and interests of different stakeholders while ensuring they are aligned with the shared objective. It also reduces communication costs for all the other stakeholders.
Success factor 3: A solid fact base for policy making
One example for a specific initiative within the financial inclusion agenda is the FinAccess survey, informing on gaps that need to be addressed and leading to further policy measures. One of these measures is the creation of the SACCOs societies Act of 2008, which established a new implementing institution, SASRA. Both show the interconnectedness of concerted financial sector innovation instruments:
Until 2005, no systematic measurement system was in place to map the financial sector. Therefore the Financial Access Partnership was created by industry, government and research institutions to generate reliable data on the financial sector. This was realised by the first FinAccess survey in 2006, a national household survey providing policymakers with information about the state of financial inclusion.
In Kenya, some 5,000 cooperatives provide financial services, formed by individuals to pool savings and lend to each other. These Saving and Credit Co-operative Societies (SACCOs) are very popular among middle- and low-income people unable to access traditional bank accounts. About 215 operate a front office service activity (FOSA), quasi-banking services with products such as savings and credit, demand deposit accounts and ATM transactions. Over the years SACCOs, grew in size and numbers and began to offer more ambitious services leading to capacity gaps in governance and technological and financial management. Without clear regulation and oversight, account holders could risk losing their money if it is given out as loans to other members without proper management.
This risk was also clearly identified by the first FinAccess survey. It showed that most people with access to financial services were using SACCOs and that SACCOs could no longer be regarded simply as negligibly small societies. Their failure could pose a systemic risk to the whole economy. As a consequence, the SACCOs societies Act was established.
To reduce uncertainly and unintended effects, policymakers must be able to design policies based on sound information. Gathering data on the need and constraints of people and companies can help bring new issues onto the government agenda.
Policymakers must also be able to measure the effects of the policy, thus allowing for an objective analysis of results that enables correction and adaptation over time. The FinAccess surveys serve both as an evaluation instrument for policies and as an agenda-setting tool to identify emerging issues.
Success factor 4: cooperation among all stakeholders at all stages of the policy making and implementation process
The SACCOs Societies Act
As we can see, FinAccess identified a major risk in the financial sector. As these challenges could not be adequately addressed by existing legislation, policymakers and key stakeholders agreed that a specific legislation was needed, which resulted in the 2008 SACCO Societies Act.
The responsible government authority for all cooperatives - and for designing the new law - was the Ministry of Cooperative Development and Marketing (MoCDM). It convened a taskforce comprised of staff from the relevant agencies, among others the Central Bank, the Cooperatives Bank, the Kenya Union of Savings and Credit Cooperatives, FSD Kenya, led by the World Council of Credit Unions.
This government task force involving all relevant public agencies to design the SACCO Societies Act, was a critical factor in gaining the consensus needed to establish the act. Open and honest dialogue among all actors involved is the essence of collaborative governance and is particularly critical to ensure that any new policy gains internal support and can be effectively embedded within existing policy frameworks. Another crucial factor for successful implementation was the combined expertise of all stakeholders during the whole process of implementing the new legislation.
The Act contains provisions to make the SACCOs offering banking services more secure and efficient, and protects the shares and deposits of the (largely poor) customer base. The main structural implication of the Act was the establishment of a new institution, the SACCO Societies Regulatory Authority (SASRA), a semi-autonomous government agency under the authority of the MoCDM. It is mandated to license deposit taking SACCOs, assisting them in meeting the regulation requirements by 2014.
As for SACCOs, in order to obtain a licence they have to establish business premises, develop a comprehensive information and risk-management framework, pass a “fit and proper” test and demonstrate minimum core capital of KES 10 million.
FSD assisted in the implementation of the new regulation in close cooperation with SASRA, by developing technical materials and toolkits, providing advice for strategic management and capacity development and information material for key stakeholders.
To date, 124 out of the 215 SACCOs - controlling 80% of the sector’s financial assets - have been licensed. They have shown a 15% rise in total assets, a 27% rise in membership and a 35% rise in share capital. SACCOs’ reputation among Kenyans has markedly improved since the start of the licensing process.
What other political support for financial inclusion and inclusive businesses in the financial sector would be important in your country? Do you know examples of success factors for IB policies in other sectors?
If you have questions or feedback or would like to contribute with your knowledge and advice, please contact the author at [email protected].
For more information on this case and other examples of inclusive business policies, you can download the complete report under: Inclusive Business Policies - How Governments Can Engage Companies in Meeting Development Goals
 FinAccess Kenya
 This is the case as of December 2011. SASRA. (2011). Sacco Supervision Report 2010 (Deposit Taking Saccos). Nairobi: The Saccos Societies Regulatory Authority.
 FSD Kenya and World Council of Credit Unions (2007). Newsletter of WOCCU/FSD SACCO CAP Project. Nairobi: FSD Kenya.
 SASRA Strategic Plan 2010/2011-2012/2013. Nairobi: SASRA.
 SASRA (2011). Sacco Supervision Report 2010 (Deposit Taking Saccos). Nairobi: The Saccos Societies Regulatory Authority.