ACTION AID KENYA

FINANCE FOR THE POOR: CASE STUDY OF KARIOBANGI URBAN DEVELOPMENT AREA SAVINGS AND CREDIT PROGRAMME

by

John Thinguri Mukui and Christine M. Guchu

April 1997
A

TABLE OF CONTENTS
ABBREVIATIONS ...................................................................................................................................................... iii INTRODUCTION ........................................................................................................................................................ 1 BACKGROUND ...................................................................................................................................................... 1 TERMS OF REFERENCE..................................................................................................................................... 1 METHODOLOGY .................................................................................................................................................. 1 SUMMARY OF THE MAIN FINDINGS ............................................................................................................... 2 KARIOBANGI-KOROGOCHO IN THE NATIONAL CONTEXT......................................................... 2 RISKS AND CHALLENGES OF URBAN SLUM DEVELOPMENT ....................................................... 2 PROGRAMME PERFORMANCE ...................................................................................................................... 2 KENYAS MACROECONOMIC PERFORMANCE AND POLICIES .......................................................... 5 HISTORICAL ECONOMIC PERFORMANCE............................................................................................... 5 KOROGOCHO IN THE NATIONAL CONTEXT ....................................................................................... 6 THE POLICY CONTEXT ..................................................................................................................................... 7 THE FINANCIAL CONTEXT ............................................................................................................................ 8 INFORMAL FINANCIAL SERVICES ............................................................................................................... 9 CONCLUSION ....................................................................................................................................................... 10 KARIOBANGI URBAN DEVELOPMENT AREA........................................................................................... 11 ACTION AIDS APPROACH TO DEVELOPMENT .................................................................................. 11 IMPLEMENTATION STRATEGY................................................................................................................... 11 ACTION AID IN KARIOBANGI ..................................................................................................................... 12 DESCRIPTION OF THE PROJECT AREA ................................................................................................... 12 RISKS AND CHALLENGES OF URBAN SLUM DEVELOPMENT ..................................................... 13 DESCRIPTION OF THE SAVINGS AND CREDIT SCHEME .................................................................... 15 AIMS AND OBJECTIVES OF THE SAVINGS AND CREDIT SCHEME ............................................ 15 GROUP FORMATION ........................................................................................................................................ 15 GROUP ORIENTATION ................................................................................................................................... 17 SAVINGS ................................................................................................................................................................. 17 LOAN FACILITIES .............................................................................................................................................. 17 LOAN APPRAISAL PROCEDURES ................................................................................................................ 18 INTEREST RATES................................................................................................................................................ 18 REPAYMENT PROCEDURES .......................................................................................................................... 19 PROGRAMME PERFORMANCE ......................................................................................................................... 20 GROUP FORMATION ........................................................................................................................................ 20 LOANS ..................................................................................................................................................................... 20 COST OF THE SAVINGS AND CREDIT FUNCTION............................................................................. 21 i

IRREVERSIBILITY AND CONTINUITY ...................................................................................................... 23 ADVOCACY ........................................................................................................................................................... 24 ANNEX TABLE 1: PROFILE OF THE KARIOBANGI SAVINGS AND CREDIT PROGRAMME (KShs) ............................................................................................................................................................................. 25 ANNEX TABLE 2: SAVINGS BY THE S&C GROUPS AS OF FEBRUARY 1997 (KShs) ..................... 26 ANNEX TABLE 3: SAVINGS ATTACHED, 1991-1996 (KShs) ..................................................................... 29 ANNEX TABLE 4: LOANS DISBURSED BY GROUP AND CYCLE (KShs) ........................................... 32 REFERENCES............................................................................................................................................................. 35 AAK-KARIOBANGI STAFF CONTACTED...................................................................................................... 37

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ABBREVIATIONS
AAK BoP CDW DA FAL GDP GNP KIP KUDA NFE NGO ODA PVO S&C SSE UDA USAID WCCR WDR Action Aid Kenya Balance of Payments Community Development Worker Development Area Functional Adult Literacy Gross Domestic Product Gross National Product Key Informant Panel Kariobangi Urban Development Area Non-Formal Education Nongovernmental Organization (British) Overseas Development Administration Private Voluntary Organization Savings and Credit Small Scale Enterprise Urban Development Area United States Agency for International Development Weekly Cash Collection Report/Receipt World Banks World Development Report

A shorter version of this paper was published as: John T. Mukui and C.M. Guchu, Finance for the poor: case study of Kariobangi Action Aid-Kenya, in: Judith Bahemuka, Benjamin Nganda and Charles Nzioka (editors), Poverty Revisited: Analysis and Strategies towards Poverty Eradication in Kenya, a UNESCO/University of Nairobi publication, February 1998.

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INTRODUCTION BACKGROUND
1. Action Aids overall goal in Kenya is that of alleviating poverty through empowering the poor and vulnerable groups, particularly women. This is mainly done through capacity building, both at the individual and group levels, and influencing public policy on matters concerning the poor. All the projects ultimately aim at improving the standard of living of the rural and urban poor. The programmes include community organisation, savings and credit, health, water, and education, targeting the poorest members of the community. Action Aid has been working in Kenya since 1975. 2. The Kariobangi Urban Development Area (KUDA) runs community-based programme interventions which include a savings and credit scheme, health, water and education. The Project has been serving a poor urban community in one of the slum areas of Nairobi, namely, Kariobangi-Korogocho. 3. The focus of this document is the savings and credit scheme. Action Aid has produced case studies of savings and credit programmes in other countries for Research & Advocacy Plan (RAP) work on finance for the poor. The studies aim to collect a set of information that will enable Action Aid to make assessments of the range of approaches used in savings and credit schemes, how the approaches have evolved, and with what intent and effect. Lessons learnt from the case studies will be compared to provide guidelines for future development of Action Aids savings and credit schemes.

TERMS OF REFERENCE
4. Action Aid Kenya (AAK) contracted the consultants to develop a case study for the Kariobangi savings and credit (S&C) scheme with the following main tasks: (a) (b) (c) (d) Assessment of the macro-economy, social and political relations; Assessment of the micro/local level livelihoods systems and context; Project/scheme description focusing on the broad framework, programme design and how it has evolved over time, programme performance, and impact assessment; and Propose a realistic advocacy agenda for AAK based on the study results.

5. The wealth of lessons from the study will be limited by the fact that there was no time for a beneficiary assessment using a structured questionnaire. In addition, interviews of AAK staffs in Kariobangi Development Area (DA) were conducted during the month of December 1996 when about half of the staffs were on leave. The assessment is not therefore an exhaustive evaluation of the Kariobangi S&C programme. A more detailed assessment that incorporates beneficiary assessment is therefore recommended.

METHODOLOGY
6. The case study was conducted at two main levels: (i) at project level by interviewing project staffs and perusing project documents; and (ii) at target group level through semi-structured interviews and focused group discussions with the beneficiaries. Documents maintained by the groups were also perused.

SUMMARY OF THE MAIN FINDINGS KARIOBANGI-KOROGOCHO IN THE NATIONAL CONTEXT

7. The place of Korogocho and other informal settlements can be understood through the concept of social exclusion from the mainstream economy. At the macro-level, the relative economic fortunes of Korogocho were the worst vis--vis other urban poor and low-income households in Nairobi as shown in the 1989 Metropolitan Household Survey. At the policy level, the Government has prepared elaborate policy documents on the informal sector, which has been inappropriately interpreted as concern for the residents of informal settlements. Area-based pockets of mass poverty are peripheral to issues of informal sector development. The formal financial sector also socially excludes the poor.

RISKS AND CHALLENGES OF URBAN SLUM DEVELOPMENT

8. Urban slums provide special conditions that are not prevalent in rural areas. One factor is land tenure. The people of Korogocho are considered illegal squatters since they live on crown land. Services such as physical planning, health facilities and other basic social requirements are partially provided or not provided at all. 9. Second, urban slum areas are characterised by a large number of single mothers and female-headed households. While men can perform casual labour in industries and construction sites, opportunities for women are fewer and some resort to brewing of illegal liquor or transactional (commercial) sex. The survival and coping mechanisms in the urban slums therefore present different challenges for both AAK and the groups that are being assisted. 10. Third, urban slums present problems in the selection of target groups for AAK family income component. In the rural development areas, AAK selects the poorest using the communitys perception of who are the poorest, i.e. social mappings. The process is simple for both the rural communities and AAK since assets are conspicuous e.g. cattle, goats and land. In Kariobangi, such social mapping could not be conducted. It is, however, assumed that a non-poor person is unlikely to attend weekly meetings and have the patience to wait for the relatively low amounts of individual loans given under the AAK S&C scheme. 11. Finally, in the rural areas where distances between neighbouring group members may be long, the textbook group-formation process of forming primary groups before federating into secondary groups is necessary since only members of the primary group are likely to know each other intimately. In congested urban slums, members of a secondary group are likely to be familiar with each other due to short distances between contiguous households. The group-formation process in Kariobangi where a secondary group was first formed and then split into primary groups is therefore not likely to have affected programme performance.

PROGRAMME PERFORMANCE
Group Formation 12. During group formation, the implications of the group guarantee system are not properly understood by all members until arrears accumulate and attachment of savings occurs. It is therefore imperative that Community Development Workers (CDWs) keep repeating the gospel of group guarantee and the implications of not adhering to the laid-down policies. It is also important that AAK strictly follows its rules e.g. for four-week arrears to lead to automatic attachment of savings. The prompt attachment of 2

savings should lead to lower rates of default and assist the groups to understand the implications of group guarantee. 13. Although a group was required to have 25 to 30 members, a few groups had up to 50 members. By February 1997, membership varied between 10 and 30 due to high dropout rates compared with replacement. Out of the 62 groups, only 34 were saving regularly as of February 1997. The groups that still save and meet regularly tend to be older and have members with stable incomes from businesses established in the area. It is therefore necessary to strengthen the concept of community organisation in the weekly meetings so that groups can financially and organisationally manage on their own without external assistance. 14. However, there is still a need to study group dynamics in an urban setting. For example, groups can form and survive because of either (a) real bonding e.g. clan- or family-based groups, or (b) the need to provide a public good1 or manage an external threat e.g. security, water and poverty. After an S&C group has received loans, peer pressure as a result of group guarantee could sustain group cohesion for the life of the programme. Interest Rates 15. Kariobangi UDA charges 15% interest on credit, and the total loan is repayable in one year at weekly rests. The two major costs of borrowing are interest rates charged and transaction costs. The implicit interest rate charged by AAK (27.69% per year) is roughly the same as those currently charged by commercial banks. The transaction costs (excluding interest) of borrowing KShs 20,000 from the major commercial banks are about KShs 15,000. Therefore, the subsidy element in AAK lending is high given that there are no transaction costs on the borrowers. Recovery of Loans 16. The repayment rates during the 1992-95 period hovered around 99%. However, the repayment rate dropped in 1996 due to suspension of loan disbursement and the subsequent demoralization of the members. The actual repayment rate for 1996 is less than the reported 94.89%, which is cumulative from 1991. During the period 1991-95, an estimated 3.20% of the loans were recovered through attachments. The cumulative share of loan recovery through attachment of savings was 5.48% as at the end of November 1996, giving an overall voluntary loan repayment rate of 89.41%. Cost of the Savings and Credit Function 17. Out of the KShs 25,252,600 disbursed from both AAK and recycled funds since 1991, half (KShs 12,831,500) was loaned out in 1995 alone. In 1995, the costs apportioned to S&C, excluding the imputed cost of AAK funds, was KShs 6,892,722. This implies that, in 1995, AAK spent cents 53.7 to disburse a shilling, i.e. expenses/loans was 53.7%. The expenses/loans ratios for 1992-94 are likely to be more than double the 1995 estimate due to low loan disbursements. In 1996, no new loans were issued until late December. 18. Income from the S&C function was 10.88% of costs in 1994 and 35.37% in 1995, giving a weighted mean income/costs ratio of 22.76% for the period 1994-95. The weighted mean is a more relevant indicator of sustainability since the dramatic increase in interest received on loans in 1995 is partly as a result of the high lending in 1994. The ratio of interest required to break-even to interest earned was 10.71 in 1994 and 2.86 in 1995, giving a weighted ratio of 4.57 for the period 1994-95. Other things being equal, this implies that the interest rate that should be charged for the savings and credit function to break-even would be 68.60%.
1 Public goods are distinguished from private goods by non-excludability and joint consumption. Non-excludability means it is economically infeasible to exclude others from its consumption regardless of whether or not they have contributed to the costs of its production, and joint consumption means the benefits obtained by any single individual in consuming the good in no way reduces the consumption benefits available to others from the same commodity (Samuelson, 1954; 1955).

Irreversibility and Continuity 19. The shift to integrated approach weakened the S&C programme. The shift was accompanied by a rapid expansion in the programme and a decline in the tracking of the S&C scheme, leading to a suspension of lending in 1996 to allow for reconciliation of accounts. 20. Within the policy guidelines developed by AAK in late 1996, the emerging philosophy of the Kariobangi S&C scheme has implications on social mapping (targeting the poorest) and the development of a savings and credit culture in the community. First, by reducing the credit limits, only the very poor and vulnerable would have the patience to attend weekly meetings and take the trouble of applying for a loan of a paltry KShs 2,000. Secondly, by limiting the maximum loan available under the programme to KShs 8,000 (about 150 U.S. dollars), the programme serves to introduce the members to a savings and credit culture rather than being the drive to actual business growth and development. 21. In AAK, funds lent out to communities are not reprogrammed to other programmes (e.g. education and health) or to AAK books. The two crucial challenges are: (a) identification of the entities that are handing over and the intended recipients, and (b) the initiation of legal entities to hand over to. The groups that have benefited from the loans may not merit being recipients after AAK disaffiliation since they are supposed to have emerged from poverty if they used the credit facilities judiciously. AAK and the groups should therefore hand over the programme to the community rather than the groups per se. Secondly, since self-help groups are not legal entities that can sue or be sued, it is necessary to initiate the formation of sound legal entities to take over the savings and credit programme. Advocacy 22. At the local community level, groups are able to manage their affairs, manage time, and follow up on delinquent loans without AAK assistance. Some of the groups have therefore been empowered: they are able to visit banks and carry out transactions, hold meetings, manage rotating savings and credit outside of the AAK programme, while a few have managed to access other sources of funds individually or as groups. The commercial banks have also been exposed to people in tatters and may, over time, develop positive attitudes towards the poor. However, a number of groups have not been able to follow up on delinquent loans and recover their savings from errant members, while others do not solve their banking problems without AAK assistance. This shows that there is still some work to be done to strengthen the group concept, leadership and cohesiveness, so that members have the confidence to search for local solutions within their groups. 23. At the macro-level, advocacy in AAK Kariobangi can be viewed as providing mechanisms for creating economic, political and social space in an effort to protect the rights of slum dwellers. The main objective of such advocacy has been to ensure that the Government and local administration appreciate that people live in the informal settlements due to lack of better alternatives. The overarching issue is the security of tenure and how to develop models for informal settlements housing, sanitation, infrastructure and other conditions that affect their wellbeing. AAK has actively participated in the Nairobi Informal Settlement Forum, especially on land tenure, education, health, and savings and credit issues. Advocacy for the poor is also a political issue and cannot be undertaken by the poor of the slums on their own without the assistance of politicians, nongovernmental organisations (NGOs) and other civil society.

KENYAS MACROECONOMIC PERFORMANCE AND POLICIES HISTORICAL ECONOMIC PERFORMANCE

24. During the first decade after independence, Kenya achieved substantial economic growth. During the period 1964-73, GDP grew at an annual average rate of 6.6%. The rapid growth resulted mainly from successful rural development policies (e.g. expansion of land under cultivation and switch to high-value crops) that led to increased agricultural output; and import-substituting industrialization supported by access to the former East African Community. The good performance was not sustained. The annual growth of GDP fell to 5.2% during 1974-80, 4.1% during 1980-89, and a low 2.5% during 1990-95. Period 1964-1973 1974-1980 1980-1989 1990-1995 Annual GDP growth (%) 6.6 5.2 4.1 2.5

25. The decline in economic performance in the seventies was due to negative economic shocks (the international exchange rates instability in late 1971 and the oil crisis of 1973) and the policy response to the shocks. Due to balance of payments difficulties and increased inflation, in late 1971, the Government imposed import controls and direct price controls on domestic retail prices, which were supposed to be short-term measures but became a long-term feature of Government interference in economic activities. 26. Kenya entered the 1980 decade with its fortunes turned against it. The coffee boom of 1976-77 had led to increased government revenues (as a result of sales and trade taxes on the extra private expenditure) and expenditures, and a temporary recovery in the balance of payments (BoP) position. The sharp fall in the price of coffee in 1978 and the Governments inability to reduce imports and expenditure led to a sharp deterioration in the budget deficit and the balance of payments position. Between 1964 and 1979, the budget deficit remained below 4% of GDP except during the boom period in 1976/77 when it rose to 5%. The increased development expenditure, the decline in revenues during the second oil crisis, the drought of 1980, and the world recession, all together caused the budget deficit to reach 9.5% in 1980/81 and worsened the overall BoP position. 27. The situation was further exacerbated by the short-lived political disturbances of 1982 which adversely affected investment, and the 1984 drought which adversely affected the agricultural sector. Changes in key incentive indicators, mainly exchange rate (a 15% nominal depreciation) and interest rates, made in late 1982 had long-term gains on resource allocation and future policy thinking on economic reform. Some economic historians consider this to have been the unintended consequence of the failed 1982 coup attempt. 28. In 1986, the Government released an economic reform programme, the Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth, as a blueprint of the envisaged structural adjustment and economic reform up to the year 2000. For renewed growth, the Sessional Paper recognized the dominant role of the private sector in revitalizing the economy, the importance of efficient use of scarce resources and control of the budget deficit, the need for a market-based incentive system, and balanced development of both rural and urban areas. Since 1986, the Government has moved towards a market-based incentive system in industrial, agricultural and financial sectors, supported by external loans and grants from bilateral and multilateral sources. 29. In 1992, there was a massive increase in money supply (defined as currency outside banks, demand deposits, call and 7 days deposits, and savings and time deposits) estimated at 35%. The increase in money 5

supply put pressure on the external account through (a) increased demand for imports and domestically produced goods with an import content, and (b) capital outflow caused by increased preference for foreign assets as a result of the downward pressure on the real domestic interest rates. However, the most devastating effects of inflation fomented by the increase in money supply were mainly distributional. Real income was shifted from people with fixed incomes and provident funds, and from savers to debtors and the recipients of the increased money supply (Government and/or private individuals) since nominal interest rates did not adjust fully. 30. The Government reform effort was slow until 1993. Since 1993, the Government has eliminated exchange controls including the capital account, except for a short list of products controlled for health, security and environmental reasons, while tariff rates on imports have been substantially reduced. The retail price controls on maize were abolished in December 1993, and the petroleum market in October 1994. Market liberalization has improved competition and reduced rent-seeking in Government. However, corruption and a basketful of assorted financial scandals have led to a virtual collapse of public services (e.g. education, health and infrastructure) and increased the vulnerability of the poor due to cost-sharing in public service delivery. 31. In 1991, the Government deregulated interest rates, allowing them to vary with demand and supply of loanable funds. Currently, one of the constraints to investment is the high interest rates charged by banks. Lending rates are in excess of 23%. High interest rates can be traced to both demand and supply sides of the loan market. On the supply side, the banking sector exhibits an oligopolistic structure with the market being dominated by four major banks. On the demand side, the 18% cash ratio and the two percent liquidity ratio imposed on banks reduce the funds available for trading purposes. The high Government borrowing from the banking sector, including lending to state-owned enterprises, is another factor contributing to high interest rates. 32. The liberalization of the economy is expected to have negatively impacted on the wellbeing of the urban poor. First, price-competition has led to the opening of large retail outlets (supermarkets) in the city centre and the residential areas, thus reducing the market opportunities for small-scale retailers. Secondly, increased competition from imports has led to declining demand for local goods and eventual collapse of some local industries, thereby reducing demand for labour. Unskilled labour is mainly sourced from the slum areas of Nairobi. Third, increase in money supply and the subsequent inflation has led to an inflation-tax on the poor. The increase in food prices as a result of drought and export of cereals has also increased the costs of subsistence for urban slum dwellers since they depend on food purchases. 33. Other recent developments that have worsened the conditions of the poor are the management of the local authority and the reliability of public utilities (water, electricity). In recent years, poor garbage collection has led to piling of garbage in residential areas and the consequential loss of space and increased health hazards. Secondly, there have been instances of water shortages in the city. Finally, power rationing in Kenya is a daily routine. This has led to virtual collapse of some industries (where the urban poor derive their livelihoods as paid labour) and self-employment opportunities (e.g. welding).

KOROGOCHO IN THE NATIONAL CONTEXT

34. The 1996 World Development Report (WDR) places Kenya at position 17 from the bottom in GNP per capita ranking, with GNP per capita of $250 compared with $80 for the poorest country (Rwanda). However, Kenyas Gini index of income concentration (57.5) is the highest among the 17 poorest countries, and only lower than Guatemala (GNP per capita, $1,200; Gini index, 59.6), Brazil (GNP per capita, $2,970; Gini index, 63.4) and South Africa (GNP per capita, $3,040; Gini index, 58.4) among all the countries in the world whose income distribution data is reported in the 1996 WDR. In addition, Kenya had the highest share of income in the richest 10 per cent of the population (47.7%). In graphical terms, Kenyas income distribution pyramid is characterized by a wide base (the income commanded by the top 10 per cent of the population) and a low gradient. The poorest 10 per cent of the rural population commanded 1.3% of total rural income (Mukui, 1994). 6

35. According to the 1982-92 Kenya Poverty Profiles (Mukui, 1994), the prevalence of urban absolute poverty in 1992 was 29.3% by adult equivalents, compared with rural poverty of 47.9%. There might be a slight understatement of computed urban poverty measures compared with rural poverty due to the phenomenon of non-household persons (e.g. beggars and parking boys), who are not captured in the national sample survey frame, and are expected to be more in urban than in rural areas. 36. However, within Nairobi and Mombasa, spatial inequality is difficult to quantify because there are no natural spatial units of analysis. Unlike rural settings where income disparities within an area may be low, a slum and a high income residential area may be separated by only a fence. Hence the difficulty in making location-specific recommendations on targeted interventions for the urban poor by the use of survey data. Mapping of poverty in a city therefore also requires casual knowledge of the locations of pockets of poverty. 37. Types of urban neighbourhoods can be classified into slum and non-slum. A slum is an informal, unplanned and overcrowded settlement, with (a) structures of temporary material, (b) poor sanitation (e.g. sewerage, water supply), (c) poor basic infrastructure e.g. access roads and health facilities, and (d) inhabited by low income households. Among the major urban centres, Nairobi has the highest concentration of slum populations. The oldest and the largest slums, which are on government land near the city centre, such as Korogocho-Kariobangi and Mathare, have some of the poorest conditions. A number of slums developed later in the west of the city, mainly Dagoretti (e.g. Kawangware, Riruta and Kangemi), while the more recent slum areas to the north are Garba, Githurai and Kahawa. 38. The relative economic fortunes of Korogocho were the worst vis--vis other urban poor and low-income households in Nairobi as shown in the 1989 Metropolitan Household Survey (see Odada et al, 1990). The survey covered households in both private and public housing developments, mainly the urban poor and low-income households. Households were surveyed in Korogocho, Kibera and Mukuru (informal settlements on public land); Kawangware (on private land); Dagoretti and Kangemi (private housing whose main occupants are low-income groups); Shauri Moyo and Jerusalem (public rental housing owned by the Nairobi City Council); and the site and service projects of Mathare North, Kayole and Umoja II. 39. The survey was targeted at low-income areas rather than slums per se, and the sample may therefore not represent homogeneous areas. However, the results showed that, Korogocho had the highest mean household size (4.55), compared with the overall mean for all the surveyed areas of 3.59; the lowest monthly income of household head, KShs 1,213 compared with KShs 1,711; the lowest percentage of married household members, 36.17% compared with 46.2%; the highest percentage of household members who reported their main occupation as nothing, 42.49% compared with 30.49%; and the highest proportion of household members who reported education status as no education, 26.42% compared with 15.50%. Whether by design or accident, the above statistics shows that AAKs establishment of Korogocho as its first urban development area in Kenya is not misplaced.

THE POLICY CONTEXT

40. AAKs programme interventions in Korogocho are designed to support the Governments efforts through promoting income and employment generating initiatives and broad-based support to informal settlements so as to achieve self-reliance at both individual and community levels. 41. In recent years, the economic reforms implemented by Government with the support of donor agencies, including direct civil service and parastatal sector staff retrenchment, has resulted in short-term reduction in the public sectors demand for labour, while the formal private sector has not been able to absorb all the output from the formal and tertiary educational institutions. 42. The informal sector has been expanding rapidly and small scale enterprises (SSEs) in Kenya employ a large number of people and provide a training ground for entrepreneurs. The Kenya Governments Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth stresses the pivotal role of the small 7

scale sector in creating employment and generating incomes. While the Government has improved the policy environment within which the informal sector operates, direct Government support to the sector has been secured by default via lack of enforcement of legal statutes, e.g. minimum wage laws and other statutes on terms and conditions of service, tax laws, and rules and regulations on public hygiene. A large share of direct support to small scale enterprises has been given by private voluntary organizations (PVOs) funded by donor agencies and church organizations. While most PVOs provide financial support, few have attempted to transform the operational and managerial capabilities of clients. 43. Governments support to informal sector development has been inappropriately interpreted as concern for informal settlements. The informal sector is an economic activity which is not necessarily confined to slums or poor households, while an informal settlement is the totality of a households livelihoods encompassing shelter, water and sanitation, security of tenure, and levels and reliability of household incomes. For example, the National Development Plan, 1997-2001 and the Policy Framework Paper, 1996-1998 lay emphasis on the necessary support to the informal sector as an economic activity, compared with the scanty concern for area-based pockets of poverty e.g. informal settlements (urban slum areas). 44. The urban poor have also been excluded in much of the national survey work on poverty. The Integrated Rural Surveys conducted in the seventies and the Rural Household Budget Survey (1982) excluded urban areas. The first major national survey to include urban areas was the 1992 National Household Welfare Monitoring and Evaluation Survey. The results of the survey were released in 1994 (Mukui, 1994). In addition, urban poverty is more difficult to conceptualize compared with rural poverty. For example, rural poverty is usually defined in the context of food availability, while urban poverty relates to incomes2.

THE FINANCIAL CONTEXT

45. Kenya has a sophisticated financial sector. As at 1995, there were about 37 commercial banks with 225 branches and 70 sub-branches (Namusonge, 1996). The market is dominated by four banks which control about 60% of deposits and credit and 70% of the branch network. Some banks e.g. Barclays Bank and Kenya Commercial Bank manage targeted programs for the poor. The programs are not within the routine bank lending but are channels of financing programmes targeting the poor from agencies e.g. United States Agency for International Development (USAID) and British Overseas Development Administration (ODA). 46. There are also a number of development finance institutions supporting the industrial and commercial sectors. These include the Industrial Development Bank (IDB), the Kenya Industrial Estates (KIE), the Industrial and Commercial Development Corporation (ICDC) and the Kenya Tourist Development Corporation (KTDC), which are Government-owned. 47. However, casual empiricism shows that the poor have been socially excluded from the formal financial sector. For example, a participatory poverty assessment (PPA) conducted in 1994 and covering Kwale, Kitui, Mandera, Nyamira, Kisumu, Bomet and Busia districts showed that only 3.7% of the responding households had access to the formal credit market. Those who reported as having no access to credit were 70.2% (Narayan et al, 1995). The urban component of the PPA covered Mathare and Korogocho. The study notes that Korogocho is among poorest of the 78 informal settlements in Nairobi. 48. The transaction costs in the formal bank lending include: (a) valuation fee if the collateral for the loan are not shares quoted in the Nairobi Stock Exchange; (b) appraisal fee for appraising the loan proposal; (c) ad valorem arrangement-cum-renewal fee paid when loan is disbursed and annually thereafter based on . Food poverty is identical to income poverty if the survival of the poor is taken to be calorie intake plus basic non-food items to ensure that an individual does not need to take more than the required minimum calorie allowance. For example, an individual lacking the minimum clothing and shelter would require a higher minimum calorie intake, while food energy can be more effectively increased by raising food-to-energy conversion through reduction in gut parasites i.e. medical care (Lipton, 1988). 8
2

the loan outstanding; (d) stamp duty paid to the government; (d) legal fees; and (f) discharge fee after full repayment of the loan. Based on the charges currently levied by the major commercial banks, the transaction costs (excluding interest) of borrowing KShs 20,000 is about KShs 15,000.

INFORMAL FINANCIAL SERVICES

49. The oldest known source of informal credit is the traditional money lender, commonly known as Shylock, who is often reviled for charging usurious interest rates. In the Old Testament, the Law of Moses (Book of Deuteronomy, 23:19-20) only allowed charging usury on the Gentiles, which has been dubbed as tribal brotherhood and universal otherhood3. The Law of Moses also commanded cancellation of debt every seventh year, except that owed by foreigners (Deuteronomy, 15:1-3). In Kenya, laws relating to informal credit, namely, the Money Lenders Act, was repealed in 1984. The Limitation of Actions Act, Chapter 22 of the Laws of Kenya, contains limitations on recovery of civil liabilities, which appear to have been modelled on the Mosaic Law on debt cancellation. The high interest rates charged by informal money-lenders are due to (a) high cost of screening potential borrowers, (b) high risk of default, and (c) the cost of pursuing delinquent loans. 50. The other source of informal financial services is NGOs who have been a major source of lending to the poor in Kenya. NGOs support to the poor increases their economic efficiency by making credit more widely available at lower interest rates and minimal transaction costs. Unlike formal financial institutions, NGOs normally provide training to their beneficiaries. 51. There are about 43 NGOs in Kenya that provide credit to the poor (Namusonge, 1994). Some NGO programmes are strictly for credit purposes e.g. K-REP and PRIDE-Kenya, while others use credit as a complementary intervention to, say, health, education and water. These include CARE-Kenya, Foster Parents Plan International, AAK, Christian Childrens Fund and Tototo Home Industries. Most of these institutions use the Grameen Bank Model of group lending where peer monitoring is largely responsible for the successful financial performance of the programmes. 52. In Korogocho, there are other organizations running savings and credit programmes with higher loan ceilings compared with AAK. The organizations include K-REP and FAULU. FAULU is a savings and credit programme launched by the Food for the Hungry International, a religious-based humanitarian organization. However, in Korogocho, AAK has the largest S&C programme in terms of membership, savings and lending. 53. Under the Grameen Bank model applied by many NGOs in the area of S&C, the cost of screening group members and pursuing delinquent loans is passed on to the group. Loans are disbursed to a group which distributes to individual members. Groups are responsible for collecting loan repayments on, say, weekly basis, and repaying the loan to the NGO. One of the challenges facing NGOs is that some combine S&C with subsidy-based programme interventions, and may therefore not have the experience and the expertise in lending and business development. The staffs of these NGOs learn on the job, and phase-out issues are raised even before the NGO has learnt sufficient lessons about the S&C programme.

. Usury is commonly interpreted as exorbitant or unlawful interest for money loaned. In the Biblical sense, it is the taking of any interest at all. See Benjamin Nelson, The Idea of Usury: From Tribal Brotherhood to Universal Otherhood, 1969, for a provocative inquiry into the historical development of ethical universalism in the West and the ambivalent Deuteronomic law of usury. However, apart from Africa and a few other developing countries, the world has moved from kinship morality of tribal society to the utilitarian liberalism of modern times. Calvin (1509-1564) was the first religious leader to exploit the ambivalence of the Deuteronomic passage to prove that it was permissible to take usury from ones brother, and hence paved the way for modern capitalism. It is not clear whether William Shakespeare (The Merchant of Venice), in contrasting the self-sacrificing Antonio with the hard-hearted Shylock, had veiled Deuteronomic overtones. 9

CONCLUSION
54. The analytical framework of the place of Korogocho and other informal settlements can be understood through the concept of social exclusion from the mainstream economy. At the macro-level, the relative economic fortunes of Korogocho were the worst vis--vis other urban poor and low-income households in Nairobi as shown in the 1989 Metropolitan Household Survey. At the policy level, the Government has prepared elaborate policy documents on the informal sector, which has been inappropriately interpreted as concern for the residents of informal settlements. Area-based pockets of mass poverty are peripheral to issues of informal sector development. The formal financial sector also socially excludes the poor.

10

KARIOBANGI URBAN DEVELOPMENT AREA ACTION AIDS APPROACH TO DEVELOPMENT

55. Action Aids Vision, Mission and Goal is linked to the realisation that: the plight of the poor people in the world has worsened as indicated by insufficient food, deteriorating natural resource base, poor access to healthcare and education, high infant mortality, widespread malnutrition, low income and lack of access to land and other productive assets. Action Aids Vision is that poverty can be reduced and ultimately eradicated. 56. AAKs approach to poverty alleviation is through empowering the poor and vulnerable groups, particularly women, through capacity building both at the individual and group levels, and influencing public policy on matters concerning the poor. All the projects ultimately aim at improving the standard of living of the poor. These programmes include community organisation, family income, health and education, targeting the poorest members of the community. 57. Community organisation facilitates the formation of development groups or committees, and training on leadership and management, and basic record keeping. The groups are expected to manage development activities in their areas. Action Aid works within a 10-year intervention cycle to allow development institutions of the poor to be created and sustained beyond the programme period. 58. Family income incorporates an S&C scheme with a savings component aimed at developing a savings culture among the poor. The S&C also avails credit to small scale entrepreneurs, thus raising the level of business income and ultimately the standard of living of the households. In the rural areas, the family income programme includes facilitating achievement of household food self-sufficiency through pre-harvest and post-harvest management, soil conservation, agro-forestry, grain banks, bio-intensive gardening, loans for seeds and ploughs, training of herders and animal health workers, and livestock restocking, among others. 59. The health programme focuses on improving the health status of children and adults through immunisation, training of community health personnel (traditional birth attendants, community health workers, and village health committees), HIV/AIDS awareness, environmental sanitation, community-based rehabilitation for the disabled, and village pharmacies. 60. The education programme aims at availing basic education based on the perspective that education is a mechanism for enlightenment and empowerment, and the realisation of a persons inherent potential. The education programme covers assistance to formal primary schools in terms of books and equipment, non-formal education (NFE) centres for children who cannot afford fees/levies in the formal schools or are too old to attend formal schools (covers children of 8-14 years), and functional adult literacy (FAL) centres for training adult learners. 61. The water programme aims at improving water resources and reducing walking distances to water points, thus enhancing their health and socioeconomic status. This is done by construction or rehabilitation of water sources, training the community on basic water purification methods, and building local capacity for project management, among others.

IMPLEMENTATION STRATEGY
62. Action Aid uses an integrated approach to development. This approach has, however, been changing with time, oscillating between integrated and sectoral approaches. In 1991-1992, AAK was using an integrated approach to development whereby a field officer would work with the community on all AAK programme components. During 1993-1994, there was a shift to sectoral approach to development which entailed that a project employed officers specialised in their own field who would meet with the community separately to discuss issues in their specific field. Under a sectoral approach, the performance of a frontline 11

savings and credit staff was judged on the management of the savings and credit portfolio. 63. The approach reverted back to integrated in 1995 where projects were no longer compartmentalised to, say, three different project officers. Each officer currently works with the community in the areas of education, health, water, and savings and credit. In Kariobangi, each village is catered for by one Community Development Worker (CDW) who deals with all programme components in the particular village. 64. While it is worth noting the positive factors attributed to an integrated approach (e.g. costeffectiveness at both community and organisation levels, holistic approach in addressing community problems, and reduced confusion at the community/village level when dealing with one AAK staff), there are still some factors that hinder the realisation of the full potential of the S&C programme. At the fore is reduced confidence of the officers e.g. making a nurse in charge of savings and credit groups which (s)he is not trained or experienced in may affect the services rendered; and the professionalism of work done that could create setbacks in programme development, as has been experienced by the backlog of record-keeping. It is only natural that an officer concentrates on what (s)he is good at, which will develop faster than other activities in the programme. 65. The shift from integrated to sectoral and back to integrated approach has had a negative impact on programme development in the short-term, as the organisation and staffs adjust to the changes. However, the long-term benefits are expected to outweigh these shortcomings as AAK aims at concentrating on empowerment of the community to take over and manage the programmes.

ACTION AID IN KARIOBANGI

66. AAK started working in Kariobangi indirectly through the Catholic Mission in 1985, where AAK provided the funds and the Catholic Mission planned and implemented the projects. The main focus was to improve education facilities and to provide conducive learning environment for children in the area. Three schools were sponsored: Baba Dogo, Ngunyumu and Korogocho Primary Schools. Activities were focused on schools only, with no interventions at the community level. 67. In November 1989, AAK started working directly in Korogocho and the programme changed its focus from purely school activities to community-based development projects. The Kariobangi Urban Development Area (UDA) was officially launched in 1991 and became the first urban project for AAK worldwide. The programme had two broad aims: (a) to influence government policy to recognise Kariobangi and other slum areas as official and legitimate residential areas and to regularise land tenure by legislation, and (b) to substantially improve the socioeconomic, environmental and physical conditions of the Kariobangi-Korogocho population by the end of ten years. One of the programmes designed to enable AAK and the area residents to achieve the two broad objectives was the family income or savings and credit programme, which encourages saving and access to credit through the formation of S&C groups.

DESCRIPTION OF THE PROJECT AREA

General Description 68. Korogocho, one of the six (6) main slums4 in Nairobi, is a sub-location of Kariobangi Location, Kasarani Division, Nairobi province. The sub-location is about 10 square kilometres with a population of 60,000 people spread in eight (8) villages (AAK Baseline Survey, 1992). The 1989 Population and Housing Census put the population at 44,415 and the area as one square kilometre. Korogocho sub-location has one of the highest urban population densities of people living in slums. An estimated 60 per cent of the population is below 15 years, thereby leading to a high dependency ratio. The area is characterised by multi-ethnic and . The other five slum areas are Mathare, Pumwani, Kibera, Kawangware and Kangemi. All the six slum areas represent an estimated 40 to 60 per cent of the Nairobi population. 12
4

mixed religious groups. Ethnic groups include the Kikuyu, Luo, Luhya, Kamba, Boran, Maasai and others. Religious representations include Muslims, Catholics, Presbyterian Church of East Africa (PCEA), Redeemed Gospel Church, Akorino and a number of other sects. 69. The settlement of this area broadly falls under four categories: (a) (b) (c) (d) The displaced freedom fighters in the fifties; The quarry and sisal plantation workers who worked for Asians and European settlers occupied the land as squatters; Migrants from other Nairobi slums who were displaced by the Nairobi City Council in the seventies; and Low-income earners and the unemployed who move in search of cheap shelter.

70. Korogocho is designated as an informal settlement (i.e. has not been designated as a residential area) but is distinguished from a squatter area since the area occupied is Government land and their occupation is officially tolerated though not legally secured. The land has not been officially allocated for development and permanent structures cannot therefore be constructed. 71. The area faces serious overcrowding, inadequate infrastructure, and lack of social amenities which makes the living conditions less than socially acceptable. Lack of established human and household waste disposal exposes the residents, especially children, to infectious diseases. There are no roads in the area and the existing lanes are not maintained. There is a major fresh water pipe passing near Korogocho and drinking water is available at water points at a cost of 50 cents per 20 litres. Economic Factors 72. Korogocho residents are among the lowest income earners. It is estimated that the medium net household income for petty traders and artisans is KShs 1,500 per month, about 43% earn less than KShs 1,000 per month, and 12% earn less than KShs 500 per month (AAK Baseline Survey, 1992). Occupation statuses of heads of households were listed as follows: self employed (24.7%), wage employment (20.9%), salaried employment (19.6%) and unemployed (34.8%). 73. The majority of residents earn their incomes from informal sector activities. Typical businesses include hawking vegetables, fish and household items in the streets of Korogocho or the Nairobi city centre. A few lucky entrepreneurs have kiosks in the village or stalls in Korogocho Market (formerly known as Soko Mjinga). Other businesses include selling of second hand clothes, food kiosks, tailoring and carpentry. Constraints in informal sector activities include poor infrastructure, saturation of the market by businesses offering similar products and services, and lack of skills for identifying new market opportunities. 74. The economy of Korogocho is based on cash. Unlike their counterparts in the rural areas, Korogocho residents have little or no access to productive assets such as land and livestock. Access to credit is another constraining factor and has been rated as one of the top priorities of the residents of Korogocho. Formal lending institutions such as banks require collateral which the poor do not have. Informal money lenders charge exorbitant interest rates, as high as 360 per cent per year.

RISKS AND CHALLENGES OF URBAN SLUM DEVELOPMENT

75. Urban slums provide special conditions that are not prevalent in rural areas. One factor is land tenure. Slum dwellers are ever in a transient situation that could be changed by eviction or elevation to a more permanent and legal status. The people of Korogocho are considered illegal squatters since they live on crown land. 76. Secondly, services such as physical planning, health facilities and other basic social requirements are partially provided or not provided at all. This, coupled with their transient situation, makes the slum dwellers 13

lethargic towards improving housing and their immediate environment. 77. Third, urban slum areas are characterised by a large number of single mothers and female-headed households. While men can perform casual labour in industries and construction sites, opportunities for women are fewer and some resort to brewing of illegal liquor or transactional (commercial) sex. The survival and coping mechanisms in the urban slums therefore present different challenges for both AAK and the groups that are being assisted. 78. Four, urban slums present problems in the selection of target groups for inclusion in development programmes. In the rural areas, selection of the poorest is possible using the communitys perception of who are the poorest, i.e. social mappings. The process is simple for both the rural communities and AAK since assets are conspicuous e.g. cattle, goats and land. In urban slums, such social mapping cannot be conducted. However, a non-poor person is unlikely to attend weekly meetings and have the patience to wait for the relatively low amounts of individual loans given under the AAK S&C scheme. 79. Finally, in a slum setting, it is possible to get small groups of contiguous households. This makes it easier for members to attend group meetings, understand each other, enforce rules on those not participating in development work, or apply peer pressure on errant members who may willingly default on their loan repayments.

14

DESCRIPTION OF THE SAVINGS AND CREDIT SCHEME AIMS AND OBJECTIVES OF THE SAVINGS AND CREDIT SCHEME
80. The overall aim of the S&C programme is to increase the income levels of the poorest members of the community so that they can improve their social and economic status and be able to participate fully in their own development. The specific objectives are to: (a) (b) (c) (d) Create a sustainable savings and credit programme through community-based institutions; Provide training and technical assistance to beneficiaries to enable them run their businesses effectively, particularly assistance in product development and diversification, skills training, business management and marketing; Increase/create employment and income-generating opportunities for residents; and Provide and/or increase access to credit to the beneficiaries for development and expansion of businesses.

81. The S&C programme is the core intervention in the improvement of the socioeconomic status of the residents of Korogocho. The programme was targeted to reach 10,000 people in ten years and create 2,000-3,000 direct- or self-employment. The target beneficiaries were petty traders, hawkers, and small scale artisans employing 2-3 people. In the previous years, the strategy was to develop a strong base for the sustainability of the savings and credit programme based on group organisation, institution building, weekly savings, credit extension, and systems development. 82. This strategy broadened in 1995 and the major thrust is now based on further strengthening and expanding group organisation, institutional building, regular savings, and credit extension activities. The formation of an umbrella organisation that will take over the management of the S&C programme is still in the formative stage and the programme is developing strategies for AAKs disaffiliation with the S&C groups. Collaboration will be further developed with other players to enable groups to access credit from other sources on their own.

GROUP FORMATION
83. The formation of groups or community organizations in Kenya is not a new phenomenon. Traditionally, activities were done in groups, whether they were income generating activities (e.g. farming) or social activities (e.g. traditional dances). Groups are formed to assist members in times of need and also act as a safety net. For example, in the so-called merry-go-rounds, members save a certain amount on a regular basis and give the money to each member on a rotational basis. 84. Groups are mainly organised on the basis of gender e.g. women/men only; by age e.g. youth groups; by activity e.g. artisans, dancers; or for specific purposes e.g. funeral groups. The groups are formed on the principle of social collateral to encourage savings and enable members to have access to loans through the group guarantee system, a la the Grameen Bank concept. 85. Community organisation is the approach underlying AAK programme activities, including savings and credit. AAKs approach is to promote group organisations to foster self-determination and economic self-reliance. Proper group formation and orientation during recruitment is key to the success of credit programmes using the group guarantee concept. AAKs credit programme is based on the principal of social collateral in which five people of similar socioeconomic standing guarantee the repayment of each others loans. These groups of five are then federated into a secondary group of 25 to 30 people. The secondary group also assumes responsibility of repaying a members loan if the primary group is not able to meet its 15

obligations. 86. New groups have been identified in four ways: a) b) c) d) Key Informant Panels identify and assist in the formation of groups. This was the initial approach which has since ceased. Existing groups may identify another interested group. An existing group may know about AAK and enquire about the organisation and the S&C programme. AAK staffs may go into the villages and identify individuals or groups

87. The first entry for the credit programme was through the provincial administration who introduced AAK to village elders. AAK used the village elders and other opinion leaders as Key Informant Panels (KIPs) to access the community for outreach and promotion and were initially responsible for recruiting groups. The initial membership of the KIPs was proposed by the village elders who were administration appointees or strong members of the ruling party, KANU. With the advent of competitive politics in December 1992, the use of KIPs was discarded to avoid political interference in the AAK S&C programme. 88. Although KIPs were more informed about the community, some misleading information was sometimes given to the groups. For example, a number of group members were from outside the Kariobangi Urban Development Area, were close relatives, or were from the same household. This was outside the policies of the S&C scheme. This affected group discipline, loan repayments, and made it difficult for such groups to follow up on loan defaulters. 89. A group interested in AAK savings and credit intervention would meet the community development workers (CDWs) to gather more information on the policies and procedures of the AAK S&C scheme. In most cases, about of the members would be running a business while the remaining would be encouraged to form an income-generating activity. 90. During the formative stage, regular savings was and is still encouraged. The group mechanism provides the poor with an efficient means for encouraging savings. The groups with existing merry-go-rounds were also encouraged to maintain the system. After preparing the group constitution with the assistance of the CDW, a group registers with the Ministry of Culture and Social Services and becomes a legitimate group within AAK. 91. The Grameen Bank Model which AAK replicates in the Kariobangi S&C function starts with the formation of a primary group of five, who are federated into secondary groups. However, the group formation process in Kariobangi-Korogocho was reversed, whereby a secondary group was first formed and then split into primary groups. Self-selection of a primary group ensures extra caution when members are selecting their fellow members. Since members are aware of the concept of group collateral, they will in most cases ensure that the other member runs a business, is in close proximity to either their home or business, and know each other well. When primary groups are formed from the secondary group, people will only know each other for the weeks they have met in the group. 92. However, in congested urban slums, members of a secondary group are likely to be familiar with each other due to short distances between contiguous households. The group formation process in Kariobangi where a secondary group was first formed and then split into primary groups is therefore not likely to have affected programme performance. 93. During the group formation or self-selection stage, the implications of the group guarantee system are not properly understood by all members until arrears accumulate and attachment of savings occurs. It is therefore imperative that CDWs keep repeating the gospel of group guarantee and the implications of not adhering to the laid-down policies. It is also important that AAK strictly follows its rules e.g. for four-week arrears to lead to an automatic attachment of savings. The prompt attachment of savings should lead to lower 16

rates of default and assist the groups to understand the implications of group guarantee. 94. There is still need to study group dynamics in an urban setting. For example, groups can form and survive because of either (a) real bonding e.g. clan- or family-based groups, or (b) the need to provide a public good or manage an external threat e.g. security, water and poverty. After an S&C group has received loans, peer pressure as a result of group guarantee could sustain group cohesion for the life of the programme.

GROUP ORIENTATION
95. During group formation, the CDW briefs the group members on AAKs policies and procedures, the group guarantee concept, and the roles of each member and the group leaders. Group leaders attend three-day training on AAK policies and procedures, the roles and responsibilities of group leaders, and how to write minutes of meetings and maintain the loan and savings records. The groups are strengthened during weekly meetings with the CDWs. 96. As in other NGO credit programmes, orientation on programme rules and procedures is concentrated in the early stages of group formation. After group formation, there is minimal training on business development concepts, a factor that a number of NGO programmes, including AAK, do not sufficiently address.

SAVINGS
97. Weekly savings is a compulsory condition for all members. After registration with AAK, each group opens a savings account and a bank passbook issued. The passbook is maintained by AAK since a group cannot withdraw its accumulated savings. AAK has not set any minimum or maximum amounts for individual savings so as not to exclude the poorest. The individual savings is decided at the group level and normally range from KShs 10 to KShs 100. Saving continues for as long as a member is involved in the credit programme. If a member wishes to leave the S&C programme, any outstanding loan is deducted from her/his accumulated savings plus interest and any balance refunded. 98. After 8 to 10 weeks savings, groups are appraised by the AAK on their understanding of the group guarantee concept and AAKs policies. Thereafter, AAK may give loans by issuing cheques in the names of individual group members. 99. Saving is a vital part of the credit programme since the accumulated savings act as collateral for the individual members, and the primary and secondary groups in AAK lending. Saving can be a powerful tool in building group solidarity as members meet weekly to contribute their savings and discuss other group matters, and may be a source of social and political strength. The regularity and adherence to a saving programme is also used by AAK in its assessment of the cohesiveness of groups. 100. In case of default, the programme deducts the individual accumulated savings equal to the outstanding loan. If the individual savings are not adequate, the balance is deducted from the primary group members to clear any outstanding amount. If again the savings of the primary group are not adequate, the savings for the secondary group members are deducted to clear the loan.

LOAN FACILITIES
101. AAK disburses loans for investment capital or working capital for business start up, expansion or diversification. Consumer loans are not provided. All loans are provided for a one-year term with principle and interest paid back on a weekly basis in fifty-two equal instalments. Members are not eligible for further loans until the previous loan is cleared and most borrowers have tended to repay their loans within the one year. As shown in Annex Table 1, lending started in late 1991. About half of the accumulated loan 17

disbursements were made in 1995, and virtually no lending was done in 1996. Out of the total KShs 25,252,600 disbursed, KShs 8.1 million (32%) has been disbursed from AAK resources, while the balance is from recycled funds. As shown in Annex Table 4, nine out of 62 groups had not received loans as of December 1996. 102. Previously, loans were disbursed in stages as follows: first cycle loans, at a maximum of KShs 5,000; second cycle loans, a maximum of KShs 10,000; third cycle loans, a maximum of KShs 15,000; and fourth cycle loans, a maximum of KShs 20,000. No loans above KShs 20,000 were available. 103. In a major policy shift, the maximum loan amounts were revised in December 1996: first cycle loans, a maximum of KShs 2,000; second cycle loans, a maximum of KShs 5,000; and third cycle loans, a maximum of KShs 8,000. There will be no fourth cycle loans, while the maximum loan available was reduced from KShs 20,000 to KShs 8,000. After the last cycle, groups are in future expected to graduate to other programmes providing higher loans and/or lend out from their accumulated savings.

LOAN APPRAISAL PROCEDURES

104. Before a group is eligible for loans, all members must save for eight consecutive weeks. After the eight weeks, two members of each primary group are eligible for loans. Selection of the first loanees is left to the primary group members. If they repay their loans well in the following four weeks, the rest of the group members become eligible for their first loans. The staggered disbursement of loans helps to reinforce the principles of group solidarity and social collateral in the early stages of group formation. 105. The process of loan appraisal has two important features. First, the major responsibility for loan appraisal is placed on the clients rather than the AAK. Secondly, the focus of appraisal extends beyond the business to include the general behaviour of the client. 106. Loans are first appraised and approved during group meetings at the primary group level and then at the secondary group level. Initially, all secondary members used to sign the loan application form, but this was later changed to only group leaders. 107. There are no loan committees to approve individual loans. Loans are assessed by all secondary group members. Groups approved the loan amounts requested for by their peers as it was not clear whether members could borrow less than the maximum amount. Members also felt that they had an obligation to endorse these amounts in expectation of a return favour when their turn came for loan application.

INTEREST RATES
108. Kariobangi UDA charges 15% interest on credit, and the total loan is repayable in one year at weekly rests. The interest is calculated as a flat rate on the basis of the principal amount lent, rather on a declining balance basis. For example, if a client borrows KShs 6,000, the monthly repayment would consist of amortization of principal (KShs 500) and monthly interest of 0.15*6,000/12 (KShs 75), making a total of KShs 575. 109. However, the effective interest paid is higher than the quoted interest if the interest was to be charged on a declining balance basis. For a loan with a nominal interest rate of (r) per cent and repayable within a year, the effective interest rate (r1) is given by the formula: r1=r*{122/ (1, 2, .., 12)}, assuming that the monthly interest for a particular month is repaid at the end of that month. If the interest rate is 15% per annum, the effective interest rate is therefore 15*144/78=27.69 per cent. 110. The two major costs of borrowing are interest rates charged and transaction costs. The implicit interest rate charged by AAK (27.69% per year) is roughly the same as those currently charged by commercial banks. As stated earlier, the transaction costs (excluding interest) of borrowing KShs 20,000 from the major 18

commercial banks are about KShs 15,000. Therefore, the subsidy element in AAK lending is high given that there are no transaction costs on the borrower.

REPAYMENT PROCEDURES
111. Loans are repaid weekly at the weekly group meetings. A primary groups repayment is not accepted if one member has not paid his/her dues. In some cases, the primary group member would repay the weekly instalment for the member. 112. The amounts collected are recorded in the Weekly Cash Collection Report/Receipt (WCCR), a copy of which is left with the group, while the CDW is left with two copies which are deposited in the AAK S&C office. Amounts collected were, where possible, banked by the treasurer or a member of the group immediately after the group meeting. The money is banked using three banking slips: the original is left with the bank, a copy for the group, and the triplicate is left at the bank for collection by AAK. The AAK credit office verifies the WCCR after receiving a valid banking slip. 113. Originally, AAK used to collect and take the funds to their office for safe-keeping overnight, for the group treasurer to collect and bank the next working day. This has since changed and groups keep and bank their own funds. In some isolated cases, the money is not banked on time or what is banked is less than the collections. Groups have had to deal with these cases themselves without any assistance from AAK.

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PROGRAMME PERFORMANCE GROUP FORMATION

114. There has been considerable progress in group formation with 62 groups formed so far. Formation of the groups has gradually grown since 1991 as follows: Year 1991 1992 1993 1994 1995 1996 No. of Secondary Groups 3 21 40 50 60 62 Annual Increase (Groups) 18 19 10 10 2 No. of Members 120 590 1,135 1,545 1,754 1,805 Annual Increase (Members) 470 545 410 209 51

The largest increase in groups and membership was recorded in 1992 mainly because the S&C scheme was started in 1991 with minimal activities in group formation. As of November 1996, females compromised 61.2% of total membership. 115. The idea of self-selection and group responsibility was a new concept and it took time for group members and leaders to fully understand the concept. Although members were expected to assess each other, the new lending concept appeared too simple and clients did not take the consequences of poor selection seriously. Some members did not give sufficient attention in the selection as long as being a group could facilitate access to AAK loans. In a few cases, AAK staff members did not fully appreciate the importance of managing recruitment well. Therefore, self-selection as a key aspect of group-based lending was not fully realised. 116. During 1996 when loan disbursement was put on hold, groups have been performing poorly, with low attendance at meetings, poor savings and loan repayments. One contributing factor is that groups coalesced for credit purposes only, and did not have a motivating factor to continue saving or repaying their loans in the absence of new credit. The main goal of AAK is to empower the poor to take control over their lives. There is therefore a need to strengthen the concept of community organisation in the weekly meetings so that groups can financially and organisationally manage on their own without external assistance. 117. Although a group was required to have 25 to 30 members, a few groups had up to 50 members. By February 1997, membership varied between 10 and 30 due to high dropout rates compared with replacement. Out of the 62 groups, only 34 were saving regularly as of February 1997. The groups that still save and meet regularly tend to be older and have members with stable incomes from businesses established in the area. 118. During group formation process, members were encouraged to start income generating activities, which could turn out to be a bane since entrepreneurship is not a universal human trait. In addition, encouraging a large number of people within the community to start businesses could flood the market with goods and services in a neighbourhood of low purchasing power, thus decreasing business profitability.

LOANS
119. Many groups signed for the maximum loans applied for by all members without strictly analysing the character and business of the applicant. Group members appraised loans expecting a return favour when their 20

turn come, or were simply unaware that they could approve less than the maximum amounts. As a result, some enterprises were over-financed, especially for second and third cycle loans, and in a few instances close relatives obtained multiple loans for the same business. Appraising loans in the secondary group makes members fear damaging their friendships with others, and thus overtly share the judgment of character or business of their fellow members. 120. Loans are repaid on a weekly basis. Where a member does not repay, the primary group may pay, otherwise non-payment for three consecutive weeks is taken as arrears in the AAK books. After four weeks, arrears are considered as default. In spite of these strict rules, AAKs attachment of savings to offset delinquent loans has been slow. As a result, attachments are effected when arrears have accumulated. Secondly, group members resent attachment of their savings to offset delinquent loans of other members. Third, there are no economic incentives for prompt loan repayment since there are no fines or interest-based penalties on late payments. Fourth, the groups are not legal entities that can sue or be sued, although this factor is unlikely to have affected programme performance. 121. As shown in Annex Table 1, the repayment rates during the period 1992-95 hovered around 99%. However, the repayment rate dropped in 1996 due to suspension of loan disbursement and the subsequent demoralization of the members. The actual repayment rate for 1996 is less than the reported 94.89%, which is cumulative from 1991. Annex Table 3 shows the savings attached by AAK for loan recovery. During the period 1991-95, an estimated 3.20% of the loans were recovered through attachments. The cumulative share of loan recovery through attachment of savings was 5.48% as at the end of November 1996, giving an overall voluntary loan repayment rate of 89.41%. 122. The Kariobangi S&C programme does not assume any risk on the outcome of the activities financed by their lending programme. However, in the AAK rural DAs, lending is mainly for agricultural purposes e.g. seed credit. In the event of, say, pests or crop failure due to drought, AAK does not aggressively attempt to recover such loans since lenders of directed credit expose themselves to risk based on the outcome of the activity being funded. This was one of the lessons of the now-disbanded Guaranteed Minimum Return (GMR) lending programme by the Agricultural Finance Corporation. 123. Finally, formal sector lenders are unwilling to expose themselves to the risk of default or debt repudiation in the absence of collateral that many poor households are unlikely to possess. The substitute for collateral in AAK lending is peer pressure which is supposed to complement pressure from the lender. In the context of microeconomic theory, the lender faces the classical market for lemons, i.e. the lender is like the buyer of a used car whose quality is unknown (Akerlof, 1970). The only sanction against moral hazard (borrowers bankruptcy or debt repudiation) is the borrowers loss of reputation which is secured through peer pressure and the inability to access credit in future. In the Kariobangi case, AAK bears minimal risk of default or repudiation since the borrowers and the cosigners bear full risk. As Stiglitz (1990) shows, transfer of risk from the lender to the cosigner leads to improvement of borrowers welfare through risk aversion in the use of borrowed funds (see also, Varian, 1990).

COST OF THE SAVINGS AND CREDIT FUNCTION

124. The evaluation team conducted a back-of-the-envelope assessment of the cost of the S&C function in the Kariobangi UDA. The personnel costs included (a) 60 per cent of the time spent by the community development workers on operations, (b) the total time of four officers wholly involved in credit, including the assistant programme coordinator, (c) 20 per cent of the time of the senior programme manager, and (d) 40 per cent of the time of the accountant. Overall, 50 per cent of the personnel costs (including medical costs) were allocated to the S&C function. 125. The second major expense category was rent, security, office repairs and office supplies. Since the community development workers are mostly in the field, they were excluded from office expenses. The sitting space occupied by the four officers mostly involved in the S&C function, 20 per cent of the space used by the senior programme manager, and 40 per cent of the space used by the accountant comprised roughly 30 21

per cent of the premises used by the Kariobangi UDA. Thirty per cent of the costs of running the office were therefore allocated the S&C function. Only 10 per cent of transport costs were apportioned since transport services are rarely used for S&C activities. 126. Out of the KShs 25,252,600 disbursed since 1991, half (KShs 12,831,500) was loaned out in 1995 alone. In 1995, the costs apportioned to S&C, excluding the imputed cost of AAK funds, was KShs 6,892,722. This implies that, in 1995, AAK spent cents 53.7 to disburse a shilling, i.e. expenses/loans was 53.7%. The expenses/loans ratios for 1992-94 are likely to be more than double the 1995 estimate due to low loan disbursements. However, in 1996, no new loans were issued until late December. 127. A straight-forward way of computing financial sustainability is to compare income and costs of the savings and credit function (Johnson and Rogaly, 1997). The Havers Sustainability Index is based on the percentage of costs covered by income, i.e. total income earned from the credit programme during the period/total credit programme costs during the period (Havers, 1996). Costs include staff, transport, office, and the imputed cost of AAK funds (interest that would be earned if the money was deposited in an interest-bearing account with a commercial bank or other financial institution). AAK funds refer to new injections for lending but do not include lending from recycled funds. The costs are supposed to include inflation so as to reflect a true cost of funds, but this was not factored in the analysis. Calculation of Havers Sustainability Index Row Number COSTS Salaries Transport Office expenses Imputed cost of AAK funds Total INCOME Interest received on loans Bank interest on savings Total Income/costs (%) Income/costs, 1994-95 (%) Costs less income Total interest on loans to break-even Interest Requirement/interest earned to break-even Interest Requirement/interest earned to break-even, 1994-95 1 2 3 4 5=1+2+3+4 6 7 8=6+7 9=8/5 10 11=5 minus 8 12=11+6 13=12/6 14 1994 5,382,859 188,789 1,223,306 512,847 7,307,801 670,452 124,304 794,756 10.88 6,513,045 7,183,497 10.71 1995 5,652,561 90,213 1,089,948 60,000 6,892,722 2,398,750 38,934 2,437,684 35.37 22.76 4,455,038 6,853,788 2.86 4.57

128. Income was 10.88% of costs in 1994 and 35.37% in 1995, giving a weighted mean income/costs ratio of 22.76% for the period 1994-95. The difference in costs between the two years was mainly due to the reduction in injection of AAK funds in 1995. The weighted mean is a more relevant indicator of sustainability since the dramatic increase in interest received on loans in 1995 is partly as a result of the high lending in 1994. 129. The computation also includes the total interest on loans that would be required to break-even (i.e. costs less income plus the interest earned on loans). The ratio of interest required to break-even over interest earned was 10.71 in 1994 and 2.86 in 1995, giving a weighted ratio of 4.57 for the period 1994-95. Other things being equal, this implies that the interest rate that should be charged for the savings and credit function to break-even would be 15*4.57, i.e. 68.60%.

22

IRREVERSIBILITY AND CONTINUITY

130. Disaffiliation of AAK from lending to the S&C groups is compounded by the meaning of graduation. A group is made of different people, with different businesses, and different credit requirements. We therefore need to understand the graduation of both groups and individual borrowers. In addition, AAK has had to deal with some internal contradictions since they give free services (education, sanitation, health) while at the same time demanding repayment of credit advanced to the same groups/ people. 131. The shift to integrated approach weakened the S&C programme for three reasons. First, an officer trained and experienced in healthcare does not have the capacity or confidence to deal with savings and credit, just like a trained credit officer is uncomfortable to discuss safe motherhood and baby-friendliness with traditional birth attendants. Second, community members may have problems discussing all their development issues with one CDW. Third, the shift to an integrated approach was accompanied by a rapid expansion of the S&C programme in the face of an inadequate monitoring system, leading to suspension of lending in 1996 to allow for reconciliation of accounts. 132. Within the policy guidelines developed by AAK in late 1996, groups are expected to graduate after receiving third cycle loans. So far three groups have started lending from own savings. Groups save on a weekly basis and the individual savings vary from KShs 10 to KShs 50. For groups that were formed in 1992, and saving KShs 10 per week, the cumulative individual savings by December 1996 was KShs 2,600, while a group that was saving KShs 50 per week would have individual cumulative savings of KShs 13,000. 133. AAK sees savings as the key to income generation and sustainability of groups, who should be able to lend themselves after AAKs disaffiliation. However, there was no original timeframe as to when groups should be able to start lending from own savings and the groups were not consulted before the recent policy changes were made. 134. A group of 30 members saving KShs 40 per week would accumulate KShs 312,000 in five years. Using the December 1996 upper credit limit of KShs 8,000, a group of 30 would disburse KShs 240,000. AAK should therefore expect groups to lend from own savings after five years within the current loan limits, rather than the three years (cycles) in the current credit policy. Alternatively, AAK should emphasize higher weekly savings if the current three-year disaffiliation policy is to succeed. For those groups which have accumulated enough savings, AAK should develop a disaffiliation strategy rather than lending low amounts that the group can afford from its own savings. 135. The emerging philosophy of the Kariobangi S&C scheme has implications on social mapping (targeting the poorest) and the development of a savings and credit culture in the community. First, by reducing the credit limits, only the very poor and vulnerable would have the patience to attend weekly meetings and take the trouble of applying for a loan of a paltry KShs 2,000. Secondly, by limiting the maximum loan available under the programme to KShs 8,000 (about 150 U.S. dollars), the programme serves to introduce the members to a savings and credit culture rather than being the drive to actual business growth and development. 136. In AAK, funds lent out to communities are not reprogrammed to other programmes (e.g. education and health) or to AAK books. The two crucial challenges are (a) identification of the entities that are handing over and the intended recipients, and (b) the initiation of legal entities to hand over to. The groups that have benefited from the loans may not merit being recipients after AAK disaffiliation since they are supposed to have emerged from poverty if they used the credit facilities judiciously. AAK and the groups should therefore hand over the programme to the community rather than the groups per se. Secondly, since groups are not legal entities that can sue or be sued, it is necessary to initiate the formation of sound legal entities to take over the savings and credit programme.

23

ADVOCACY
137. At the local community level, groups are able to manage their affairs, manage time, and follow up on delinquent loans without AAK assistance. Some of the groups have therefore been empowered: they are able to visit banks and carry out transactions, hold meetings, manage rotating savings and credit outside of the AAK programme, while a few have managed to access other sources of funds individually or as groups. The commercial banks have also been exposed to people in tatters and may, over time, develop positive attitudes towards the poor. 138. However, a number of groups have not been able to follow up on delinquent loans and recover their savings from errant members, while others do not solve their banking problems without AAK assistance. This shows that there is still some work to be done to strengthen the group concept, leadership and cohesiveness, so that members have the confidence to search for local solutions within their groups. 139. At the macro-level, advocacy in AAK Kariobangi can be viewed as providing mechanisms for creating economic, political and social space in an effort to protect the rights of slum dwellers. The main objective of such advocacy has been to ensure that the government and local administration appreciates that people live in the informal settlements due to lack of better alternatives. The overarching issue is the security of tenure and how to develop models for informal settlements housing, sanitation, infrastructure and other conditions that affect their wellbeing. AAK has actively participated in the Nairobi Informal Settlement Forum, especially on land tenure, education, health, and savings and credit issues. 140. However, the average Kenyan is generally docile, and is not very vocal in defending his/her rights. The poor are more vulnerable to harassment and other limitations of economic and social space. In addition, the local administrations who are supposed to protect their rights may have interests in accessing the land for private use. Advocacy for the poor is therefore a political issue and cannot be undertaken by the poor of the slums on their own without the assistance of politicians, NGOs and other civil society.

24

ANNEX TABLE 1: PROFILE OF THE KARIOBANGI SAVINGS AND CREDIT PROGRAMME (KShs)
Year 1992 1993 1994 1995 1996 Note: (a) (b) (c) (d) (e) (f) (g) Borrowers 590 940 1,545 1,694 1,579 Secondary Groups 21 40 50 60 62 Amount Disbursed 2,500,800 5,675,600 12,421,100 25,252,600 25,252,600 Amount Due 1,612,536 3,786,344 8,795,355 19,634,975 28,099,280 Amount Repaid 1,555,572 3,770,859 8,681,477 19,420,074 26,663,374 Loan Balance 1,307,844 1,904,742 5,342,083 10,017,737 1,780,523 Net Savings 560,134 1,265,750 2,535,088 4,418,679 5,944,357 Repayment rate (%) 96.47 99.59 98.71 98.91 94.89 Savings/loans (%) 42.83 66.45 47.46 44.11 333.85

The figures are as at the end of each year, except in 1996 when the reference date is 30th November 1996. Amount Repaid includes savings attached. Amount Due less Amount Repaid is equal to arrears plus default. Net Savings is equal to total savings less attachments, refunds and fines. Repayment Rate is (Amount Due)/ (Amount Repaid). The annual repayment rates and savings/loan ratios are cumulative from the time the S&C scheme was started in late 1991. The figures for 1996 given by AAK did not include amount due. However, since no new loans were issued until late December 1996 and AAK loans are repayable within a year, the loans disbursed during December 1995 (KShs 3,596,000) x 1.15/12 (i.e. KShs 344,617) was assumed to be the part of the loan balance (KShs 1,780,523) that was not due by the end of November 1996. The amount due was therefore estimated as 26,663,374 + 1,780,523 - 344,617 = 28,099,280.

Source: AAK Kariobangi

25

ANNEX TABLE 2: SAVINGS BY THE S&C GROUPS AS OF FEBRUARY 1997 (KShs)

Group 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Number of Members 30 30 18 26 30 21 24 11 26 27 30 27 30 25 21 10 29 15 25 8 30 27 30 25 29 25 30 Weekly savings per person 20 20 100 20 25 40 50 20 20 100 20 50 50 50 50 20 50 20 30 40 20 30 20 30 50 20 20 Cumulative Savings 126,726 140,132 416,703 156,475 189,687 223,360 190,464 133,583 126,043 153,019 103,933 300,196 256,000 208,353 70,032 117,134 190,755 161,726 172,878 195,528 171,732 135,568 106,640 158,626 224,507 123,336 74,900 26 Average cumulative Savings 4,224 4,671 23,150 6,018 6,323 10,636 7,936 12,144 4,848 5,667 3,464 11,118 8,533 8,334 3,335 11,713 6,578 10,782 6,915 24,441 5,724 5,021 3,555 6,345 7,742 4,933 2,497 Savings balance 28,413 128,451 127,414 156,616 90,206 153,127 164,583 81,117 123,913 166,634 64,350 203,820 307,860 181,827 76,586 129,400 192,582 78,432 175,683 157,827 149,362 146,957 103,520 135,386 219,500 63,231 31,450 Loan balance January 1997 0 53,886 5 25 24,516 54,141 175,468 9,691 3,936 679 22,117 2,429 14 768 21,452 1,990 96,257 1,928 4,266 24 187,092 5,719 80,716 18,494 147,765 3,142 495 Average Savings balance 947 4,282 7,079 6,024 3,007 7,292 6,858 7,374 4,766 6,172 2,145 7,549 10,262 7,273 3,647 12,940 6,641 5,229 7,027 19,728 4,979 5,443 3,451 5,415 7,569 2,529 1,048 Average Loan balance 0 1,796 0 1 817 2,578 7,311 881 151 25 737 90 0 31 1,022 199 3,319 129 171 3 6,236 212 2,691 740 5,095 126 17

Group 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

Number of Members 11 30 10 30 28 30 23 28 27 30 30 30 10 24 31 27 12 12 12 12 30 28 29 29 30 12 9 30 5 30 27

Weekly savings per person 20 50 50 20 0 20 20 0 40 40 30 30 40 40 20 20 20 20 20 30 10 20 20 25 20 20 20 20 20 20 20

Cumulative Savings 100,964 122,383 197,311 116,218 ? 105,862 85,199 ? 123,489 148,751 148,860 135,450 78,415 89,691 75,750 95,560 98,949 67,848 49,529 66,980 48,885 48,597 59,850 84,844 36,630 49,895 34,700 41,740 47,800 31,700 52,330 27

Average cumulative Savings 9,179 4,079 19,731 3,874 ? 3,529 3,704 ? 4,574 4,958 4,962 4,515 7,842 3,737 2,444 3,539 8,246 5,654 4,127 5,582 1,629 1,736 2,064 2,926 1,221 4,158 3,856 1,391 9,560 1,057 1,938

Savings balance 21,004 4,188 194,565 98,717 5,184 78,432 78,362 2,333 99,157 150,421 130,280 129,719 81,607 56,775 60,786 101,404 29,803 70,627 36,838 67,027 43,285 46,793 51,386 85,050 30,102 51,696 9,366 43,040 10,430 32,596 47,384

Loan balance January 1997 0 1,967 35,075 180,272 14,150 3,360 24,558 3,798 28,293 22,618 32,950 1,473 60,408 3,073 115,791 4,074 1,485 78,067 64,788 92,679 0 40,387 72,688 22,850 64,301 13,481 0 0 0 0 0

Average Savings balance 1,909 140 19,457 3,291 185 2,614 3,407 83 3,672 5,014 4,343 4,324 8,161 2,366 1,961 3,756 2,484 5,886 3,070 5,586 1,443 1,671 1,772 2,933 1,003 4,308 1,041 1,435 2,086 1,087 1,755

Average Loan balance 0 66 3,508 6,009 505 112 1,068 136 1,048 754 1,098 49 6,041 128 3,735 151 124 6,506 5,399 7,723 0 1,442 2,506 788 2,143 1,123 0 0 0 0 0

Group 59 60 61 62 TOTAL * * * Note:

Number of Members 11 26 23 28 1,453

Weekly savings per person 20 20 810 50

Cumulative Savings 28,778 37,800 17,950 83,100 7,239,844

Average cumulative Savings 2,616 1,453 780 2,968 4,983

Savings balance 12,069 38,345 18,271 80,166 5,735,455

Loan balance January 1997 0 0 0 0 1,899,601

Average Savings balance 1,097 1,475 794 2,863 3,947

Average Loan balance 0 0 0 0 1,307

The column on weekly savings refers to the latest rather than the current since some groups no longer save regularly. Outstanding savings = Savings + Bank Interest - (Refunds + Attachments + Bank Charges). Group 61 saved KShs 810 per person only once, although four members paid less. The names of groups have been deleted and replaced by numbers.

Source: AAK Kariobangi

28

ANNEX TABLE 3: SAVINGS ATTACHED, 1991-1996 (KShs)

Group 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 March 1993 528 30,696 0 0 0 10,245 5,515 6,160 0 2,310 0 165 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 May 1993 4,016 0 0 0 0 3,505 330 8,715 0 5,390 2,090 3,425 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 August 1993 6,496 0 0 0 0 0 0 2,375 0 3,985 0 4,730 0 0 0 0 990 935 0 0 0 0 0 0 0 0 0 0 0 October 1993 3,168 0 0 0 0 990 0 0 0 550 0 8,195 0 0 0 0 4,730 3,065 0 0 0 0 0 0 0 0 0 0 0 September 1994 0 0 48,729 0 7,769 24,156 0 16,774 4,644 2,118 10,032 0 0 0 0 0 7,309 3,920 5,410 0 18,870 0 0 10,734 882 18,120 48,452 2,695 715 July 1995 0 0 0 0 112 10,902 0 6,954 264 2,118 0 0 0 0 0 0 0 25,355 5,745 0 0 0 0 24,928 0 4,355 0 227 1,665 August 1995 29 27 0 14,729 8,873 20 0 8,333 0 10,530 0 0 3,330 0 7,830 0 5,636 0 33 0 0 0 0 0 0 0 0 4,013 0 March 1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7,883 14,017 0 0 28 0 113 5,129 0 0 0 June 1996 14,814 0 0 0 84,422 49,999 23,161 29,296 2,310 679 31,506 12,069 0 0 0 0 0 0 4,266 0 15,198 0 0 0 2,668 38,894 5,985 1,660 0 November 1996 0 0 0 3,552 55,490 0 0 6,773 0 0 0 636 0 37,418 0 0 74,441 0 0 0 3,333 0 0 0 0 0 0 0 114,119 Total 29,051 30,723 48,729 18,281 156,666 99,817 29,006 85,380 7,218 27,680 43,628 29,220 3,330 37,418 7,830 0 93,106 33,275 23,337 14,017 37,401 0 28 35,662 3,663 66,498 54,437 8,595 116,499

29

Group 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 TOTAL Cumulative Total Amount Due

March 1993 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 55,619 55,619

May 1993 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 27,471 83,090

August 1993 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 19,511 102,601

October 1993 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 20,698 123,299 3,786,344

September 1994 0 0 26,620 3,770 1,290 9,025 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 272,034 395,333 8,795,355

July 1995 6,794 0 0 2,425 1,107 15,417 0 3,627 0 0 0 0 4,855 0 4,551 0 5,130 0 0 0 0 0 0 0 0 0 0 0 0 0 0 126,531 521,864

August 1995 0 0 0 4,884 5,566 0 3,330 2,886 0 60 0 6,271 0 3,249 9,721 3,249 0 3,360 0 0 0 0 0 0 0 0 0 0 0 0 0 105,959 627,823 19,634,975

March 1996 22 0 0 20 3,778 24 0 0 6,660 0 283 21 0 0 90 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 38,078 665,901

June 1996 331 0 14,370 44,588 0 0 0 6,743 27,163 5,967 5,314 5,349 6,409 0 955 1,532 7,749 4,903 0 270 4,995 0 7,768 0 0 0 0 0 0 0 0 461,333 1,127,234

November 1996 9,306 0 0 0 0 0 20,808 0 28,082 9,681 0 0 0 0 0 0 48,288 0 0 0 0 0 0 0 0 0 0 0 0 0 0 411,927 1,539,161 28,099,280

Total 16,453 0 40,990 55,687 11,741 24,466 24,138 13,256 61,905 15,708 5,597 11,641 11,264 3,249 15,317 4,791 61,167 8,263 0 270 4,995 0 7,768 0 0 0 0 0 0 0 0 1,539,161 1,539,161

30

Group Amount Repaid Cumulative Attachments/ Amount Due (%) Voluntary Repayment Rate (%) Overall Loan Recovery Rate (%)

March 1993

May 1993

August 1993

October 1993 3,770,859 3.26 96.33 99.59

September 1994 8,681,477 4.49 94.21 98.71

July 1995

August 1995 19,420,074 3.20 95.71 98.91

March 1996

June 1996

November 1996 26,663,374 5.48 89.41 94.89

Total

Note:

The names of groups have been deleted and replaced by numbers.

Source: AAK Kariobangi

31

ANNEX TABLE 4: LOANS DISBURSED BY GROUP AND CYCLE (KShs)

Group 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Male 13 16 27 6 15 5 13 5 11 9 6 8 10 4 0 12 4 22 9 8 16 8 14 15 0 21 12 8 11 12 11 14 First Cycle Female Amount 36 245,000 14 137,500 12 247,500 24 150,000 14 145,000 19 120,000 12 125,000 20 125,000 8 95,000 20 145,000 24 75,000 17 62,500 20 75,000 20 60,000 20 50,000 13 62,500 24 70,000 8 75,000 20 72,500 11 47,500 12 70,000 21 72,500 16 75,000 10 62,500 30 75,000 7 70,000 18 75,000 12 47,500 15 65,000 18 75,000 19 75,000 14 70,000 Date Oct-91 Feb-92 Jan-92 Mar-92 Mar-92 Apr-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Nov-92 Nov-92 Nov-92 Nov-92 Dec-92 Dec-92 Dec-92 Dec-92 Dec-92 Dec-92 Sep-93 Sep-93 Sep-93 Sep-93 Nov-93 Nov-93 Nov-93 Nov-93 Nov-93 Dec-93 Dec-93 Male 8 17 11 ? 4 8 9 5 17 15 6 16 10 4 0 11 3 2 8 9 12 8 9 12 0 15 0 9 15 12 8 0 Second Cycle Female Amount 19 168,000 17 240,000 7 151,200 ? 156,000 26 180,000 17 150,000 9 108,000 15 120,000 13 180,000 13 168,000 21 90,000 12 140,000 20 150,000 13 85,000 19 95,000 13 120,000 25 140,000 13 75,000 17 125,000 12 105,000 16 140,000 19 135,000 21 150,000 13 250,000 30 291,000 10 250,000 0 0 11 190,000 15 298,000 14 260,000 21 290,000 0 0 Date Oct-92 Dec-94 Aug-93 Mar-93 Mar-93 Nov-93 Aug-93 Nov-93 Aug-93 Nov-93 Nov-93 Apr-94 Dec-93 Dec-93 Nov-93 Nov-93 Mar-94 May-94 Dec-93 Dec-93 Dec-93 Sep-94 Sep-94 Dec-94 Oct-94 Jul-95 Dec-94 May-95 Dec-94 Dec-94 Male 7 0 0 4 4 6 11 3 6 9 9 13 0 6 0 0 4 0 0 16 14 ? 11 0 0 0 0 5 0 3 14 Third Cycle Female Amount 21 201,600 0 0 0 0 22 253,000 26 300,000 15 315,000 14 360,000 8 110,000 6 165,000 18 259,000 21 240,000 14 362,500 0 0 19 375,000 21 255,000 0 0 25 430,000 0 0 0 0 14 435,000 16 450,000 ? 375,000 19 450,000 0 0 29 435,000 0 0 0 0 6 165,000 0 0 7 150,000 16 450,000 Date Dec-93 Mar-94 Mar-94 Jul-95 Dec-94 Dec-94 Nov-94 Nov-94 Jul-95 Jun-95 Apr-95 Dec-94 May-95 Dec-94 Apr-95 Dec-95 Nov-95 Dec-95 Nov-95 Nov-95 Dec-95 Male 8 0 0 3 3 0 12 0 16 0 0 0 0 0 0 3 0 0 0 4 Fourth Cycle Female Amount 22 570,000 0 0 0 0 23 500,000 27 600,000 0 0 12 476,000 0 0 10 520,000 0 0 0 0 0 0 0 0 0 0 0 0 7 200,000 0 0 0 0 0 0 4 160,000 Date Mar-95 Jul-95 Jun-95 Dec-95 Dec-95

Dec-95

Dec-95

32

Group 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 TOTAL Average Loan Sizes Groups 1 - 3 Groups 4 - 10

Male 6 9 7 19 1 21 18 9 13 9 14 9 6 3 17 15 11 9 13 10 6 4 11 2 11 10 4 11 4 12 570

First Cycle Female Amount 22 70,000 15 60,000 21 75,000 11 150,000 19 150,000 9 150,000 12 150,000 16 125,000 15 140,000 21 150,000 15 145,000 18 135,000 23 145,000 27 150,000 13 150,000 15 150,000 17 140,000 20 145,000 16 145,000 20 150,000 6 60,000 5 19 3 19 17 7 15 19 16 899 5,752,500 4-7,000 5,000

Date Jan-94 Jan-94 Jan-94 Mar-94 Apr-94 Apr-94 Jun-94 Jul-94 Aug-94 Sep-94 Sep-94 Sep-94 Sep-94 Nov-94 Nov-94 Dec-94 Dec-95 Dec-95 Dec-95 Dec-95 Nov-95

Male 3 7 0 17 3 21 17 5 11 9 14 4 3 4 7

Second Cycle Female Amount 23 257,000 16 220,000 0 0 10 270,000 27 300,000 9 300,000 13 300,000 5 100,000 13 240,000 22 300,000 13 265,000 8 120,000 9 120,000 8 120,000 5 120,000

Date Jul-95 Mar-95 Sep-95 Jul-95 Jul-95 Aug-95 Nov-95 Dec-95 Oct-95 Nov-95 Dec-95 Nov-95 Nov-95 Nov-95

Male

Third Cycle Female Amount

Date

Male

Fourth Cycle Female Amount

Date

388

652

8,032,200 6-10,000 6,000

6,536,100 7,200 10-15,000

49

105

3,026,000 20,000 20,000

33

Group Groups 11 - 35 Groups 36 - 53

Male

First Cycle Female Amount 2,500 5,000

Date

Male

Second Cycle Female Amount 10,000 10,000

Date

Male

Third Cycle Female Amount 15,000

Date

Male

Fourth Cycle Female Amount

Date

Note:

The names of groups have been deleted and replaced by numbers.

Source: AAK Kariobangi

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REFERENCES
Akerlof, G., The Market for Lemons: Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, 84(3), August 1970 Havers, Mark, Financial Sustainability in Savings and Credit Programmes, Development in Practice, 6(2), 1996 Johnson, Susan, and Ben Rogaly, Financial Services and Poverty Reduction, Oxfam Development Guide published in Collaboration with Action Aid, 1997 Kenya, Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth, Nairobi, Government Press, 1986 Kenya, Economic Reforms for 1996-1998: Policy Framework Paper, Government Printer, Nairobi, 1996 Kenya, National Development Plan, 1997-2001, Government Printer, Nairobi, 1996 Lipton, Michael, The Poor and the Poorest: Some Interim Findings, World Bank Discussion Paper No. 25, World Bank, Washington, D.C., 1988 Mosley, Paul, Optimal Incentives to Repay in Institutions Lending to Low-Income Groups: An Indonesian Case Study, Savings and Development, 19(3), 1995 Mukui, John T., Kenya: Poverty Profiles, 1982-92, Report Prepared for the World Bank and the Ministry of Planning and National Development, March 1994 Namusonge, G.S., Action Aid Kenya Credit Programme: Utilization and Effect on Target Beneficiaries, Consultant Report Prepared for Action Aid Kenya, July 1994 Namusonge, G.S., Situation Analysis of the Financial Services Sector to the Poor in Kenya, Consultant Report Prepared for Action Aid Kenya, July 1996 Narayan, D., and D. Nyamwaya, A Participatory Poverty Assessment: Kenya, British ODA and UNICEF, 1995 Nelson, B., The Idea of Usury: From Tribal Brotherhood to Universal Otherhood, second edition, University of Chicago Press, Chicago, 1969 Odada, J.E., and J.O. Otieno (eds.), Kenya: Socioeconomic Profiles, Ministry of Planning and National Development and UNICEF, June 1990 Rogaly, Ben, Micro-finance evangelism, destitute women, and the hard selling of a new anti-poverty formula, Development in Practice, 6(2), 1996 Samuelson, Paul A., Diagrammatic Exposition of a theory of Public Expenditures, Review of Economics and Statistics, November 1955 Samuelson, Paul A., The Pure Theory of Public Expenditures, Review of Economics and Statistics, November 1954 Stiglitz, Joseph E., Peer Monitoring and Credit Markets, World Bank Economic Review, 4(3), September 1990 Varian, Hal, Monitoring Agents with Other agents, Journal of Institutional and Theoretical Economics, 146, 1990 35

World Bank, Kenya: Poverty Assessment, Population and Human Resources Division, Eastern African Department, Africa Region, 1995 World Bank, World Development Report 1996, New York, Oxford University Press, 1996

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AAK-KARIOBANGI STAFF CONTACTED

NAME Shahana S. Ahmed Gerald Mureithi Phoebe Kilele Lilian Okola Antony Kavuo Damaris Omundo Titus Muthusi Emmanuel Ngaruiya Jeremiah Momanyi Margaret Ayieko John Mburu

DESIGNATION Senior Programme Manager Assistant Programme Coordinator Zonal Coordinator Accountant Senior Community Development Worker Community Development Worker Community Development Worker Administrative Assistant Credit Assistant Credit Assistant Programme Assistant

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