Microfinance: A journey through emerging Kenya

From June 9 to 12, at the invitation of impact investment manager Blue Orchard, an investor trip – a so-called field trip – to Kenya took place, in which I participated as fund manager of ERSTE RESPONSIBLE MICROFINANCE.

he country has an area of approximately 580,000 km2 and a population of around 54 million. It has been an independent state since 1963, when it broke away from British colonial rule. he capital of the predominantly Christian country is Nairobi in the south between the eponymous Mount Kenya and Mount Kilimanjaro in neighboring Tanzania.

Emerging economy

Alongside South Africa and Nigeria, Kenya is one of the largest economies in sub-Saharan Africa. With a gross domestic product per person of around USD 2,100, the country achieves “lower-middle income” status. The country’s economic drivers are the still important agricultural sector with exports of tea, grain and cut flowers, a well-trained workforce, Mombasa as a very important regional port, tourism and a market-oriented and reform-minded government. The key interest rate is currently 12%, and inflation has recently been falling slightly at an annual rate of 7.7%. The national currency is the Kenyan shilling (KES) and has appreciated by around 25% against the euro since the start of 2024! The forecast economic growth for 2024 is 5.5% (IMF estimate) and the literacy rate is 83%.

Kenya is currently the highest weighted country in Africa in the ERSTE RESPONSIBLE MICROFINANCE with a share of 0.94%. Blue Orchard has a regional office in Nairobi with 6 employees. From there, they currently cover 37 customers in 17 African countries.

Easy access to financial services

There are currently 12 microfinance banks and 31 lending institutions in Kenya. These are regulated and supervised by the Central Bank of Kenya. Due to the high penetration of financial services via cell phones and digitalization, many loans have been processed in this way in recent years. This had the advantage of easier access to financial services, but also brought about the need for a corresponding law to prevent over-indebtedness and excessive interest charges for micro-borrowers.

As a result, three private credit bureaus were established to monitor microcredit lending in the country. Despite the high level of digitalization, less than a quarter of Kenya’s adult population has access to formal credit. The average microloan amounts to EUR 130 and has a short term of 6 months

Visits to various companies

The programme included visits to financial service providers and microfinance institutions (MFIs) that specialize in granting loans to small and medium-sized enterprises (SMEs) and microloans, as well as a meeting with representatives of a microinsurance company whose activities are particularly important in the agricultural sector. We also visited two groups of micro-borrowers in the school sector and in agriculture. Here is a brief overview of the financial market participants we visited in Kenya:

MFI Juhudi Kilimo (“Successful Agriculture”)

This relatively small microfinance institution recently received its first international loan and employs 400 people in 53 branches. The focus of lending is on group loans to 10 – 15 members in rural areas who mutually guarantee repayment. In addition to ongoing technical support from the MFI, there is also a monthly exchange between the loan officer and the loan customers.

The degree of digitalization has increased significantly in recent years, and insurance is also offered – an app has been developed for taking out insurance against crop failures. The average loans have a term of 12 – 18 months with an average amount of around EUR 200. The interest rate is currently 24% for individual borrowers and 27% for group loans.

M-Pesa

Is a pioneer in mobile phone innovation and is part of the regional telecom provider Safaricom. With branches across the country and in seven other African countries from Egypt to South Africa, this fintech currently has over 10 million customers. Money can be sent from phone to phone via this platform. Every day, 120 – 150 million transactions are made via M-Pesa.

Since credit cards play a very minor role in Kenya, this platform is also ubiquitous for payment services such as Spotify, Netflix, e-commerce marketplaces and others. M-Pesa is not an MFI that can be invested in via the FIRST RESPONSIBLE MICROFINANCE, but it supports access to financial services (“enabler of financial inclusion”) for millions of people and ensures a positive development of “financial health” in Africa.

Oaktree School

Private school located in the Athi River region outside Nairobi. This school, which is a loan customer of the MFI “Ed Partners”, which specializes in education, was founded in 2014 and is attended by kindergarten children from the age of 2 / 3 years and school children aged 6 – 13 years. A maximum number of 15 pupils per class enables very good and constructive lessons. Lessons take place Monday to Friday from 8 am to 2 pm. The school year lasts from January to December with longer vacations in April and August. The school fees cost around 200 euros per term and around 25% of the school fees are used for teachers’ salaries. The property is rented, with the aim of purchasing it in the medium term.

Ed Partners has been supporting 483 schools in Kenya since 2018, with a total loan portfolio of around USD 4.3 million. Its aim is to finance affordable private schools in Kenya in order to pursue the mission of “Improving access and quality with affordable education”.

Credit insurance Pula

Founded in 2015 with a focus on digital insurance in the agricultural sector. In addition to Africa, the company is also active in Pakistan and is expanding further into Latin America and other Asian countries. With 114 employees, the company supports small-scale farmers in the technical area as well as offering insurance against climate risks and the resulting crop failures.

Conclusion

As the visits on this field trip show, microfinance is not only about providing loans to build and expand professional livelihoods in emerging and developing countries, but also involves a variety of different actors in the local financial markets to provide people with access to financial services and transfer knowledge. Further information on the ERSTE RESPONSIBLE MICROFINANCE and a comprehensive update on the fund can be found on our website.

Notes ERSTE RESPONSIBLE MICROFINANCE

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE MICROFINANCE as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current §21 AIFMD Document, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE MICROFINANCE, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE MICROFINANCE as described in the Fund Documents.

Advantages for the investor

• Global lending in particular to individuals in emerging markets is supported.
• Correlation is low compared to traditional asset classes.
• Opportunity for long-term attractive earnings.

Risks to be considered

• With regard to the modalities regarding the issue and redemption of unit certificates, please note the key investor information / KID and § 21 AIFMG point 10.
• Investments are made in alternative investments, which in particular involve increased liquidity risks.
• Due to the investment in foreign currencies, the net asset value in Euro can be negatively impacted by currency fluctuations.
• Capital loss is possible.
• Risks that may be significant for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus or the information for investors pursuant to § 21 AIFMG, section II, “Risk information”.