Archives for category: financial portfolios

I’ve been asked about a zillion times what is the difference between savings and credit cooperatives (SACCOs), microfinance institutions (MFIs) and commercial banks. I’ve never had time to reply properly but now I came across this table from the World Council of Credit Unions (see below) that summarizes the differences in very simple terms. If there are other issues not included in the table (I’m sure there are tons), please write them down in the comment section.

Credit Unions

Commercial Banks

Other Microfinance Institutions (MFIs)


Not-for-profit, member-owned financial cooperatives funded largely by voluntary member deposits For-profit institutions owned by stockholders Institutions typically funded by external loans, grants and/or investors


Members share a common bond, such as where they live, work or worship. Service to the poor is blended with service to a broader spectrum of the population, which allows credit unions to offer competitive rates and fees. Typically serve middle-to-high income clients. No restrictions on clientele. Target low-income members/clients, mostly women, who belong to the same community.


Credit union members elect a volunteer board of directors from their membership. Members each have one vote in board elections, regardless of their amount of savings or shares in the credit union. Stockholders vote for a paid board of directors who may not be from the community or use the bank’s services. Votes are weighted based on the amount of stock owned. Institutions are run by an appointed board of directors or salaried staff.


Net income is applied to lower interest on loans, higher interest on savings or new product and service development. Stockholders receive a pro-rata share of profits. Net income builds reserves or is divided among investors.

Products & Services

Full range of financial services, primarily savings, credit, remittances and insurance. Full range of financial services, including investment opportunities. Focus on microcredit. Some MFIs offer savings products and remittance services.

Service Delivery

Main office, shared branching, ATMs, POS devices, PDAs, cell phones, Internet Main office, shared branching, ATMs, POS devices, PDAs, cell phones, Internet Regular visits to the community group

My supervisor calls them “institutions of hope” but most academics use fancier acronyms like ROSCAs and ASCAs, or terms like merry-go-round, saving clubs, business associations or insurance networks. Kenyans just use the word “chama” to define “groups” or “associations” that people voluntarily create to pull resources, help each other or find common “rules of the game” in areas where there is little legal enforcement.

Yesterday, during one of the awesome Kariobangi lunchtime conversations (that’s when the best observations always come out!), my table companions and I realized that it would be impossible to understand the dynamics of local markets without considering chamas. They are an “infrastructure” of regulation and financial support that shapes the way businesses function. Though, there are huge differences within the local market in Kariobangi/Korogocho: my impression is that the more businesses operate informally, the more they depend on chamas, the more business are formalized, the lower is their reliance on these social networks–we’ll see what the data says.

The best statements that came out during lunch:

  1. The informal economy would not exist without chamas.
  2. If the government effectively outlawed chamas, the informal economy would disappear (let’s hope that no politician is listening to us!).
  3. Chamas are more relevant today than they used to be for our parents.
  4. Everybody uses chamas, also the rich people.

Yes, but probably in a positive way.

If you have missed the recent news, the Central Bank of Kenya (CBK) increased its key lending rate by a shocking 11.75% in only 3 months. Besides granting Njuguna Ndung’u the title of Africa’s least effective central bank governor, this move will force local financial institutions like Equity Bank, Cooperative Bank or Family Bank to increase interest rates on loans from around 19% to 25%. The SME sector will be badly hit by the new rates.

Though, microfinance institutions might gain a competitive advantage in this adverse scenario.

The MFIs—which are generally funded through concessionary loans from international development institutions— have been spared the high cost of funds that banks have suffered following successive interest rate increases by the Central Bank of Kenya.

This has enabled the MFIs to hold their lending rates at just below 20 per cent, affording their customers lower cost of loans than what the commercial banks are charging.

This situation might bring some fresh air to the Kenyan MFI industry over the short term. Though, my opinion is that the CBK lending rates will decrease over the next few months as inflationary pressures ease down. Furthermore, although MFIs interest rate might be temporarily lower than commercial banks, they are still high in absolute terms for the profits made by informal sector businesses, which are decreasing because of high inflation.

Saving up’, or setting money aside until it grows into a usefully large sum, is hard to do. An alternative is to ‘save down’ – to set money aside to repay a loan rather than build a pot of savings. A loan is, essentially, an advance against future savings, and for a number of reasons saving down (borrowing) can help ensure that those savings really are made.

Somehow I missed this excellent blog post by Stuart Rutherford from a few months back.  He argues that “saving down” (i.e. borrowing and repaying a loan) has a variety of advantages in low-income contexts, although many people prefer to save rather than be indebted with a MFI.

First, borrowing provides you outside help with the discipline you need to make the savings, since the lender has a strong interest in getting you to (re)pay and will take steps to make sure you do. Second, with a loan you get the lump sum up-front, so borrowing provides you with certainty that the lump sum that you will build through saving is indeed created, and not lost, stolen or blocked. Third, borrowing is timely: you get the lump sum now, when you need it, not after a laborious and uncertain saving effort.

He takes the example of SafeSave, his project in a slum in Bangladesh

SafeSave clients borrow-and-repay much more than they save-and-withdraw. Why?

Many clients tell SafeSave researchers that they’d like to save more and borrow less: it’s less stressful, cheaper, provides a greater sense of security, and lump sums formed that way don’t need to be repaid. But they constantly fall into a liquidity trap. They save, but when the next urgent spending need arrives their accumulated savings aren’t enough to satisfy it, so they borrow. Now, with the need to make repayments added to the constant pressure of regular expenditure, their capacity to save is constrained even further, and so the cycle deepens and repeats

After last week’s post on microfinance vs credit cooperatives we want to talk more about the “socio-financial landscape” in urban economies in Kenya. The fieldwork we are doing in Kariobangi is telling us some interesting stories.

First, we are realizing that the term “unbanked” depicts a completely wrong image of what’s happening in local economies: most entrepreneurs in Kariobangi, both informal and semi-formal, have one or more bank accounts. This might be the particular case of Kenya where the financial sector has deepened in the low-income population. Furthermore, banks must find their market segments in complex preexisting financial structures: in addition to bank accounts, entrepreneurs use a variety of other (mostly unconventional) financial instruments. In a certain way, the term “hyper-banked” seems more appropriate than “unbanked”.

So what are the “financial portfolios” of MSEs?

Starting from the informal side of the spectrum, the most common socio-financial instruments are the so-called ROSCAs (Rotating saving and credit associations) and ASCAs (Accumulating Savings and Credit Associations). ROSCAs are also known as “mery-go-round”: members of the groups meet regularly and contribute a certain amount. Then the entire “pot” (or lump-sum) of money collected goes to one member at each meeting on a rotating basis. ASCAs work on a similar way, but the money collected is given as a loan, not a lump-sum, to the members who apply for it, who have to pay it back to the group with interest over an agreed period. At the end of the year, all the money collected by the group plus interests on loans is divided among the group members.

Other common group types are the so-called saving clubs, where members simply keep their savings for future use; the investment clubs, where the money is used for investment in business, property or stock markets. Then there are the welfare associations, which operate as informal insurance companies. Moneys collected by groups are used only for emergencies, such as hospitalizations or funerals.

On the more formal side of the spectrum, there are the institutions that everybody knows: banks, microfinance institutions (MFIs) and credit cooperatives (SACCOs). We are noticing a growing hostility towards MFIs because of the high interest rates and the “harassment” of debtors when they are late with the repayments. Though, many businesses said that MFIs were very important for the growth of their business, but they can’t afford to borrow repeatedly over time. Some businesses also secured loans from banks such as Equity Bank and Co-operative Bank. Though, it is only a minority of businesses.