Rural Financial Services in Kenya: What is Working and Why?

This study examines emerging and innovative rural finance models in rural Kenya, with the aim of understanding models that are working, why they are working, characteristics, opportunities and constraints. The study states that:

• Most mainstream commercial banks in Kenya shut down their rural branches in the late 1990s,
• Non-traditional financial institutions emerged to fill this gap.

The study utilizes primary data (interviews with rural financiers) and secondary data (discussions with stakeholders from rural finance) from fifteen districts in Kenya. It examines the following models of rural financing: Community-Owned Rural Finance Model, Private Commercial Bank Led Model, Government Led Rural Finance Model, Credit-Guarantee-Input Supply Model, and the Beach Banking Model. The study finds that:

• Provision of credit is skewed toward the productive region and is mainly provided by community-based credit providers and cooperatives.
• The proportion of clients that borrow accounts for less than 40% of the banking clients, this is an indication that promoters of rural finance should consider the provision of other financial services.
• The problem of financial sustainability plagues group-lending mechanisms.
• Policy interventions that want to increase financial service should strengthen community-owned models that have wide outreach and low costs.

The study concludes that a successful credit system in agriculture requires a concerted effort in the production process. The government and other stakeholders in the sector should provide support services such as agricultural extension, marketing and infrastructure.