By Njuguna Ndung’u, Lydia Ndirangu and Armando Morales
Njuguna Ndung’u is an associate professor of economics at the University of Nairobi and was previously Governor of the Central Bank of Kenya. Lydia Ndirangu is the Head of the Research Centre at the Kenya School of Monetary Studies. Armando Morales is the IMF Resident Representative in Kenya.
It is the topic du jour for policymakers in almost every developing economy—especially in sub-Saharan Africa. Financial inclusion makes saving easier and enables accumulation and diversification of assets, boosting economic activity in the process. As its economies continue to grow, the region must take one crucial step if it wants to escape the poverty trap, and even more so now as commodity exporters face a downward terms-of-trade trend: deliver more financial services to people and institutions.
Yet access to financial services for the poor has been limited. Minimum bank balance requirements, high ledger fees (costs for maintaining micro accounts), and the distance between poor people’s homes and bank outlets hinder their access to financial services and credit. Moreover, unaffordable “collateral technology” (the system of fixed assets required for loan approval) raises costs more than anything else, and the financial products available are often not suitable for customers with low and irregular income.
Banks have had to bear high costs to provide financial services to the poor. Market segmentation, low technological development, informality, and weak regulation increase the costs of doing business. In Kenya, and in Africa more broadly, markets are heavily segmented according to income, niche, and location, and their sophistication, level of development, and formality or informality reflect that segmentation.
High customer-monitoring costs, perceived higher risk, and a lack of transparent information have been almost insurmountable challenges for banks, and microfinance and other specialized institutions have not been able to fill the gap.
