How are private financial institutions helping improve financial inclusion?
HABIL OLAKA: From the banking sector’s perspective, two developments have charted the way forward for financial inclusion. The first is the convergence of banking services with infrastructure providers, in which banks are leveraging on existing infrastructure to provide services to Kenyans with no previous access. Putting up bricks-and-mortar branches wherever services are needed would not make economic sense. Instead, through the agency banking model, consumers are able to access banking services in very remote areas.
Second, there is the convergence of banking services with mobile devices. Here, banks have leveraged on the platform available to access a wide range of consumers on their cell phones. We see technology playing a significant role in that banks are now able to access consumers much more efficiently than was initially possible. We have also seen technology play a role in reducing the cost of services for consumers.
These two developments have carried our financial inclusion agenda to a much higher level. The most recent FinAccess survey showed that access to financial services has improved since 2009 from 41% to 67%. This means that only 33% are excluded from formal financial services, which is a significant step forward.
What is being done to reduce the number of nonperforming loans in Kenya?
OLAKA: At individual banks, there has been quite a lot of focus on setting up risk management systems that improve surveillance processes, all with oversight from the central bank. This is one of the banking industry’s major contributions. One big problem we are facing is the asymmetry of information between borrower and credit provider. When conducting a credit appraisal in Kenya, an analyst does not have good information about the application before him. With such lack of information, the risk is sometimes perceived as higher than it actually is, often resulting in stringent terms or denial.
What we did as an industry, therefore, was create the credit information sharing (CIS) initiative, a special partnership between the Kenya Bankers Association and the central bank. Previously we had been sharing only negative information, but we realised this was not working. If this sort of information goes to the Credit Reference Bureaus (CRBs), you are immediately blacklisted. We had to be sure the right message went out. Under the new system, when positive information is available you will be able to get a more balanced credit report, and can use that report to access better terms (or availability of credit in the first place). We now have a system of full file reporting, where the credit provider is better able to assess proposals and where price is based on information available. We have also cleaned up the data so that information coming in is comparable to the information sent to the central bank. The same numbers should then be passing on to CRBs.
Once these two sets of records were matched, we knew we were on the right track. The next step will be to bring in other providers, for example the Higher Education Loans Board, which has been a major beneficiary of this programme. Considering the data we have, and where we have come from, the initiative has been very effective. We now have a means of tracking the progress of the targets we have set.
What are the biggest challenges to encouraging an increase in the domestic savings rate?
OLAKA: We must mobilise savings first through the likes of pension funds, and then through long-term life insurance. These are the two sectors that can generate the savings we can leverage for long-term investments. Policies should target enabling those sectors.
At the household level, one challenge is that as long as disposable income is low, individuals will not prioritise saving. They will instead focus on their daily consumption needs, and the amount put aside for savings is minimal. The critical thing is to increase disposable income so they have money both to spend and to save.
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