The Dynamics of Competition in Karatina's Financial Markets: Assessing the Impact of Microfinance in Kenya

This paper is based on work conducted by Imp-Act - a three-year action-research programme aiming to improve the quality of microfinance services and their impact on poverty. Learning from the experiences of 30 microfinance institutions (MFIs) in four continents, Imp-Act is developing and encouraging the use of internal practitioner-focused impact assessment that can serve as a means to improve practice and service delivery, not only satisfy the needs of external stakeholders. An important element of Imp-Act's work is assessing the wider impacts of microfinance, beyond the immediate financial effects on clients and their families. This paper addresses the reality that most impact-related research concentrates on the direct impact of microfinancial services on users. However, one of the less-discussed objectives of donor support to the entry of microfinance institutions into financial markets has also been to demonstrate to other players in the market how financial services can be provided profitably to poor clients. Additionally their impact on the market may be to enhance competition. Studies examining these claims are virtually non-existent. This paper seeks to address this gap, with a focus on microfinance in Kenya. The study focuses on the town of Karatina in Central Kenya, an area of concentration for the Kenyan MFI industry. Evidence from this study suggests that MFIs have in fact been small players in the overall financial market; while they have demonstrated the existence of a small business market for loans they have not significantly developed products to appeal to a wider clientele. Indeed it appears to be macroeconomic influences that have forced the commercial banks to re-examine who their mass market is, and, in competition with Equity Building Society and the Savings and Credit Cooperative (SACCOs), it is this sector of the market that is most dynamic. The research revealed that demonstration effects from group mechanisms appear strong - especially from managed Accumulating Savings and Credit Association (ASCAs) - with some better-off clients recognising the benefits of operating financial services for themselves. Competition for deposit accounts is strong and players such as the Equity Building Society and SACCOs are learning how to serve this market - and how to link loan products to their savings accounts. After conversion into formal financial entities, the MFIs may find that they are competing in a well-served market with high service standards and must be ready for this. The paper concludes by setting out the challenges for local MFIs. These include the need for much more flexible products which respond to customer's needs; the need to justify their interest rates; avoidance of overly aggressive expansion strategies that risk provoking multiple membership and over-indebtedness; a greater understanding of the dynamics of their local markets; and finally collective action by MFIs to defend their strategic position and develop their competitive advantage in an increasingly competitive market.