PRESENTED AT THE 5 TH AFRACA CONFERENCE ON MICROFINANCE HOLDING IN BENIN REPUBLIC FROM JULY 2 ND - 4 TH BY EMMA W. KIMANI K-REP FEDHA SERVICES LIMITED. KENYA

BACKGROUND OF KENYAS FINANCIAL INDUSTRY Nearly 40% Kenyans are financially excluded (FinAccess, 2006) with the majority of these in sparsely populated rural areas. Nearly 40% Kenyans are financially excluded (FinAccess, 2006) with the majority of these in sparsely populated rural areas. High transaction costs associated with low transaction sizes, poor infrastructure, high poverty incidences and low population densities typical of rural Kenya dissuade other service providers, such as MFIs, from operating in these areas (FSD News, 2007). High transaction costs associated with low transaction sizes, poor infrastructure, high poverty incidences and low population densities typical of rural Kenya dissuade other service providers, such as MFIs, from operating in these areas (FSD News, 2007). It is on this premise that this paper highlights K-Reps experience in implementing Financial Service Association in order to address the unmet financial needs in rural Kenya s Arid and semi arid areas. It is on this premise that this paper highlights K-Reps experience in implementing Financial Service Association in order to address the unmet financial needs in rural Kenya s Arid and semi arid areas.

What is Financial Services Association The FSAs (loosely referred to as village banks) were set up by K-Rep development Agency (KDA) in the arid and semi arid districts of Kenya. The funding to set them up was from USAID, DFID and DANIDA. The first one was opened in November 1997 The FSAs (loosely referred to as village banks) were set up by K-Rep development Agency (KDA) in the arid and semi arid districts of Kenya. The funding to set them up was from USAID, DFID and DANIDA. The first one was opened in November 1997 Financial Service Associations (FSAs) are membership based financial organizations offering credit, savings and money transaction services to their members Financial Service Associations (FSAs) are membership based financial organizations offering credit, savings and money transaction services to their members The FSA original model was `user owned and user managed. This therefore meant that the shareholders ( members of the FSA) elect a board who in turn hire the staff to run the FSA. The FSA original model was `user owned and user managed. This therefore meant that the shareholders ( members of the FSA) elect a board who in turn hire the staff to run the FSA.

Rationale for KFS creation contd. KDA was faced with a lot of challenges whose main root was poor management and governance. KDA was faced with a lot of challenges whose main root was poor management and governance. In trying to get the answer to these challenges, KDA started two different pilots: In trying to get the answer to these challenges, KDA started two different pilots: Management contract arrangement where KDA would hire the manager with adequate skills and competences Management contract arrangement where KDA would hire the manager with adequate skills and competences

Rationale for KFS creation contd Formation of an Apex – the FSAs formed a superior board that took the position of KDA but FSAs contributed some money towards the maintenance of the structure Formation of an Apex – the FSAs formed a superior board that took the position of KDA but FSAs contributed some money towards the maintenance of the structure The pilot of the two models took place between The outcome of the two pilot clearly pointed out that the intervention at the management level had a greater impact on the survival and indeed sustainability of the FSA The pilot of the two models took place between The outcome of the two pilot clearly pointed out that the intervention at the management level had a greater impact on the survival and indeed sustainability of the FSA

Rationale for KFS creation contd It is against this background that KDA wrote a proposal to FSD-K (Financial Sector Deepening Trust- Kenya) to enable KDA to introduce the management contract concept. It is against this background that KDA wrote a proposal to FSD-K (Financial Sector Deepening Trust- Kenya) to enable KDA to introduce the management contract concept. The issue of sustainability at the FSA and the KDA level was of paramount important The issue of sustainability at the FSA and the KDA level was of paramount important KDA and FSD-K jointly agreed to create a limited liability Company that would offer management services to the FSA at a fee and inculcate in it a corporate culture devoid of the NGO culture. KDA and FSD-K jointly agreed to create a limited liability Company that would offer management services to the FSA at a fee and inculcate in it a corporate culture devoid of the NGO culture.

Transformation of the FSA: what KFS had to embark on Market Research: Market Research: The research considered the views of existing and potential clients/shareholders on products and services offered and also the institutional positioning. Market research is vital and is constantly being used to inform management on various issues. The research considered the views of existing and potential clients/shareholders on products and services offered and also the institutional positioning. Market research is vital and is constantly being used to inform management on various issues.

Transformation continues Product refinement and development Product refinement and development to re-examine the existing products in the context of the research and identified refinements which were implemented. At this stage the aim was not to develop entirely new products which would have required considerable effort to implement but took opportunities for more modest enhancements. to re-examine the existing products in the context of the research and identified refinements which were implemented. At this stage the aim was not to develop entirely new products which would have required considerable effort to implement but took opportunities for more modest enhancements.

Transformation continues Risk analysis Risk analysis A thorough analysis of risk across the FSA looking at both credit risk and operational risk was done. It revealed deficiencies in the effective management of both types of risk which contributed to high arrears rates seen across a large number of FSAs, while the latter has resulted in a number of frauds. A thorough analysis of risk across the FSA looking at both credit risk and operational risk was done. It revealed deficiencies in the effective management of both types of risk which contributed to high arrears rates seen across a large number of FSAs, while the latter has resulted in a number of frauds.

Transformation continues Business process mapping Business process mapping A major focus in the refinement of the basic FSA model has been the institutionalising identified improvements in the business processes and systems ) Process mapping was undertaken as a part of the risk analysis with the aim of identifying opportunities for improvements to processes, either to better control risks or enhance efficiency. A major focus in the refinement of the basic FSA model has been the institutionalising identified improvements in the business processes and systems ) Process mapping was undertaken as a part of the risk analysis with the aim of identifying opportunities for improvements to processes, either to better control risks or enhance efficiency.

Transformation continues Systems Systems A review and possible refinement of the current manual systems for accounting, portfolio monitoring and production of management information was logically undertaken in conjunction with operational risk analysis and process mapping. A review and possible refinement of the current manual systems for accounting, portfolio monitoring and production of management information was logically undertaken in conjunction with operational risk analysis and process mapping.

Strategic and business planning KFS head office staff will equip the FSA managers with skills in strategic and business planning that will enable them to take the lead in planning at the FSA level with the support of the branch and head office. KFS head office staff will equip the FSA managers with skills in strategic and business planning that will enable them to take the lead in planning at the FSA level with the support of the branch and head office.

KFS SERVICE OFFER TO FSAS Strategic and Business Planning Strategic and Business Planning Financial Management Financial Management Business Development Business Development Operations Management Operations Management Management Information Systems (MIS) Management Information Systems (MIS) Advocacy Advocacy Capacity building Capacity building

Impact on transformation

Lessons learnt a. planning and execution of the strategies faster than the competition is a must! b. Maintain a culture that recognizes and rewards performance c. Market led products is the only way to maintain royal happy customers and a happy FSA d. There are risks associated with rapid growth that need to be acted upon once identified e. There is huge potential that remains to be tapped

Current Challenges lack of effective governance at the FSA level who can drive the vision of the FSA and continue to increase the return on the shareholders wealth lack of effective governance at the FSA level who can drive the vision of the FSA and continue to increase the return on the shareholders wealth Having staff working together in the same FSA but have different employers Having staff working together in the same FSA but have different employers Retention of the skilled staff is a huge challenge as the major banks and MFIs offer them high packages Retention of the skilled staff is a huge challenge as the major banks and MFIs offer them high packages

End Thank you Thank you