Financial Inclusion Issues to Watch in East Africa, 2012

Sub-Saharan Africa (SSA) continues to be a region plagued with challenges but ripe with opportunities in microfinance. Just one in five households has access to formal financial services, with high operating expenses as well as a general lack of financial infrastructure, supervisory frameworks or consumer protection plans being just a few of the stumbling blocks to greater financial inclusion.

Despite these challenges, microfinance in SSA has gained momentum during the past few years. The cellular phone market is growing fastest in SSA, with more than 65% of the population living within reach of a network – Kenya is, of course, the most well-known example of how to effectively leverage this technology. We’re also seeing changes in the market structures across the region, with for-profit providers playing an increasingly important role and depositors outnumbering borrowers.

It is against this context that I would like to look ahead to three key issues to watch in SSA, specifically within the East Africa Community, in 2012.

Soaring interest rates in the East Africa Community (EAC): threat to financial inclusion and reduced income for regulated MFIs
The average lending rate of 25% in the EAC is likely to negatively impact both existing and potential borrowers, through higher interest rates and low uptake of new loans. Significant effects on the economy and financial inclusion are also likely to be seen, by way of larger government budget deficits and banks reducing their lending books. There are two specific cases to watch in the coming year – Kenya and Uganda.

The debate on the proposed amendments to the Kenyan finance bill to cap bank interest was the key issue in the economy towards the end of 2011 and will continue to be a major issue in 2012, a Kenyan presidential and parliamentary election year. A private member bill is pending before Kenyan Parliament, which seeks to prevent banks from charging borrowers more than four percentage points higher than the Central Bank Rate (CBR) of 18% (December 2011). The lending rates in Kenya currently stand at 25-30%. Inflation stood at 18.93% as at December 2011.

In Uganda, legislators have declared an ‘economic war’ on the government over its alleged failure to control soaring interest rates. In December 2011, inflation stood at 27% – an 18-year high – and in an effort to curb this problem, the Bank of Uganda increased its lending rate to commercial banks from 20% in October 2011 to 23% in January 2012. The move has forced commercial banks to increase their lending rates to as high as 35%.

The above rates compared to those of Bank of Tanzania (BoT) CBR rate of 7.58% as at December 2011 and an inflation rate of 19.2% in November 2011 which suggest that it is only a matter of time before BoT raises its CBR in line with inflation rate.

East Africa Community (EAC) Financial Sector Integration: opportunities for financial inclusion
The higher level objective of the EAC financial sector integration is to establish a single market in financial services among the EAC partner states (Kenya, Uganda, Tanzania, Rwanda, Burundi). This will be achieved through two back-to-back projects over an eight-year period. Improving access to financial services by the underserved is critical to the promotion of equitable market-driven economic growth within the EAC.

Although financial systems in the EAC are at different levels of development, they have two key common characteristics: a) financial inclusion rates are typically low; b) the banking sector dominates formal financial service provision with a limited range of financial products. The aim is to leverage the establishment of a single market and benefits of scale associated with regionalisation to make a broader range of formal financial services/products available to a more diversified client profile, including the underserved. In addition, the expected competition among financial service providers operating at a regional level will drive down costs/prices.

Kenya’s agent banking guidelines: Business unusual or business as usual for MFIs?
The Central Bank of Kenya has issued guidelines for both commercial banks and deposit-taking Microfinance Institutions (DTMIs). So far, Equity Bank has appointed over 8,000 agents and the number is increasing. An expanding network of bank agents is likely to increase financial access, but may cause MFIs to change the way they do business.