the role of apex mechanisms in Kenya and Uganda

343 Pages·2008·2.28 MB·English

by  Richter, Patricia

Integrating Microfinance into the Financial System
The Role of Apex Mechanisms in Kenya and Uganda

INAUGURALDISSERTATION
zur
Erlangung der Würde
eines Doktors der
Wirtschaftswissenschaft
der
Fakultät für Wirtschaftswissenschaft
der
Ruhr-Universität Bochum

Vorgelegt von

Dipl. Kauffrau Patricia Richter
aus Jena / Deutschland
2006
Table of Contents

Table of Contents i
List of Tables iii
List Figures iv
List of Boxes v
List of Acronyms vi

INTRODUCTION 1
1 Research Questions 2
2 Organisation of Thesis 3
3 Research Methodology 4

CHAPTER ONE
FINANCIAL SYSTEM DEVELOPMENT AND MICROFINANCE 14
1.1 Financial System 14
1.1.1 Functions of the Financial System 15
1.1.2 Characteristics of Financial Transactions: Information and Transaction Costs 19
1.1.3 Segmentation and Fragmentation in Financial Systems 25
1.2 Modern Microfinance 28
1.2.1 Microfinance as a Segment of the Financial System 28
1.2.2 Extending the Frontier of Finance: Challenges to Microfinance 32
1.3 Financial System Development in Developing Countries: Linkage or
Integration? 33

CHAPTER TWO
APEX MECHANISMS AS INTERMEDIARY INSTITUTIONS IN MICROFINANCE 37
2.1 Mapping Microfinance Apex Mechanisms 38
2.1.1 What are Microfinance Apex Mechanisms? 38
2.1.2 Categories of Microfinance Apex Mechanisms and Unit of Analysis 40
2.2 Theoretical Background 42
2.3 Analysing Microfinance Apex Roles 50
2.3.1 Role ONE: Financial Intermediation 51
2.3.2 Role TWO: Market Development 55
2.3.3 Amalgamation: Pooling Services in One Mechanism 65
2.4 Results of Previous Studies 68
2.5 Case Studies: Apex Mechanisms in Uganda and Kenya 70
2.5.1 Apex Related Research Questions and Hypotheses 71
2.5.2 Apex Case Studies: Uganda 71
2.5.2.1 Microfinance Support Centre Ltd. (MSCL) 72
2.5.2.2 Center for Microfinance (CMF) 101
2.5.3 Apex Case Studies: Kenya 109
2.5.3.1 Kenya Rural Enterprise Programme (K-Rep) 109
2.5.3.2 Jitegemee Trust Ltd. (JTL) 118
2.5.3.3 Micro Enterprises Support Programme / Trust (MESP/T) 125
2.5.4 Across-case Analyses 134
2.5.4.1 Uganda: The Continuous Apex 134
i
2.5.4.2 Kenya: The Discontinued Apex 138
2.5.4.3 Across-case and Across-country Analysis 142

CHAPTER THREE
LIFE CYCLE OF MODERN MICROFINANCE 145
3.1 Evolution and the Life Cycle Approach 145
3.1.1 Origins of Evolutionary Thinking in Natural Sciences and Economics 146
3.1.2 Basic Characteristics of Life Cycle Models 148
3.1.3 Potential and Limitations of Evolutionary Approaches and Life Cycle Models 151
3.2 Application of Life Cycle Concepts 153
3.2.1 Exemplary Life Cycle Concepts 154
3.2.2 Industry Life Cycle 154
3.2.3 Aggregation of Life Cycles: Hierarchical Systems? 157
3.3 Life Cycle of the Modern Microfinance Industry 159
3.3.1 Microfinance as an Industry 160
3.3.2 Social System Framework 161
3.3.3 Framework for Analysing the Development of Modern Microfinance 164
3.4 Case Studies: Microfinance Development in Uganda and Kenya 168
3.4.1 Guiding Research Questions and Hypotheses 168
3.4.2 Case Study: KENYA 169
3.4.3 Case Study: UGANDA 188
3.4.4 Across-case Analysis 207
3.4.5 Critical reflection of research results 210

CHAPTER FOUR
APEX FUNCTIONS IN THE LIFE CYCLE OF THE MODERN MICROFINANCE
INDUSTRY 212
4.1 Linking Apex Functions to Financial System Development 212
4.2 Apex Functions in the Development of Modern Microfinance 214
4.2.1 Uganda’s Continuous Network Solution: The “Seamless Apex” 214
4.2.2 Kenya’s Discontinued Islands Pattern: The “Rough Edges” 216
4.2.3 Across-case Comparison 218
4.3 Conclusion 219

SUMMARY 220

BIBLIOGRAPHY 224

Annex 1: List of interview partners 243
Annex 2: Interview Guideline (template for apex mechanism) 246
Annex 3: KEY PRINCIPLES OF MICROFINANCE 261
Annex 4: Center for Microfinance (CMF) 263
Annex 5: Kenya Rural Enterprise Programme (K-Rep) 280
Annex 6: Jitegemee Trust Ltd. (JTL) 297
Annex 7: Micro Enterprises Support Programme / Trust (MESP/T) 312
Annex 8: Kurzlebenslauf 334
ii
List of Tables

Table 1: Systematisation of case study designs.........................................................6
Table 2: Information asymmetries in financial transactions: causes, consequences and
response design................................................................................... 22
Table 3: Credit as transaction. Assigning phases to the course of a credit transaction.. 24
Table 4: Microfinance intermediaries...................................................................... 29
Table 5: Exemplary areas holding back the development of microfinance ................... 32
Table 6: Key areas of financial sector deepening ..................................................... 35
Table 7: Categories of apex mechanisms................................................................ 40
Table 8: Differences in control aspects between equity and debt financing.................. 41
Table 9: Distinguishing attributes of market, hybrid, and hierarchy governance structures
.......................................................................................................... 48
Table 10: Portfolio of financial and non-financial apex services.................................. 50
Table 11: Potential conflicts of interest................................................................... 67
Table 12: External funding of MSCL as of 2003 in US$ ............................................. 76
Table 13: Cost-sharing proportion for MSCL training and technical assistance grants ... 93
Table 14: Apex functions fulfilled by MSCL.............................................................. 96
Table 15: Have potential conflicts of interest materialised for MSCL until 2003? .........100
Table 16: Apex functions performed by CMF ..........................................................106
Table 17: Have potential conflicts of interest materialised for CMF? ..........................109
Table 18: Apex functions performed by K-Rep........................................................114
Table 19: Have potential conflicts of interest materialised for K-Rep?........................118
Table 20: Apex functions performed by JTL............................................................122
Table 21: Have potential conflicts of interest materialised for JTL?............................125
Table 22: Apex functions performed by MESP/T......................................................130
Table 23: Have potential conflicts of interest materialised for MESP/T?......................133
Table 24: Comparison of the apex functions that CMF and MSCL performed...............135
Table 25: Comparison of the potential conflicts of interest that materialised in MSCL and
CMF...................................................................................................136
Table 26: Comparison of the apex functions that K-Rep, JTL and MSEP/T performed...139
Table 27: Comparison of the conflicts of interest that materialised in K-Rep, JTL and
MESP/T..............................................................................................140
Table 28: Comparison of apex functions performed by apex mechanisms in Kenya and
Uganda..............................................................................................143
Table 29: Rating of the occurrence of conflicts of interest in apex mechanisms in Kenya
and Uganda........................................................................................144
Table 30: Functional Activities in an Industry Social System ....................................162
Table 31: Microfinance Industry Structure Elements: Triple-M..................................165
iii
Table 32: Framework for Analysing the Development of Modern Microfinance ............168
Table 33: The three tiers of Kenyan MFIs ..............................................................178
Table 34: Stages of microfinance development in Kenya .........................................187
Table 35: Tiered approach for regulating the Ugandan financial system.....................192
Table 36: Classification of Ugandan MFI according to performance indicators.............196
Table 37: Stages of microfinance development in Uganda........................................206
Table 38: Apex functions in financial system development.......................................213
Table 39: Alternative providers of apex functions during the development of microfinance
in Uganda...........................................................................................216
Table 40: Alternative providers of apex functions during the development of microfinance
in Kenya.............................................................................................218

Tables in the annexes:
Table 41: External funding of K-Rep from 1991-94 in KSh.......................................281
Table 42: Numbers of loans disbursed by K-Rep partner NGOs to clients 1984-94......293
Table 43: List of JTL loans to MFIs as of June 30th 2003 ..........................................308
Table 44: Partner organisations of MESP (1997-2002) and the MESPT (2003-06/2004)
.........................................................................................................323
Table 45: List of MESP loans to MFIs.....................................................................325

List Figures
Figure 1: Institutional sources of data......................................................................8
Figure 2: Outline of the research process................................................................ 13
Figure 3: Equilibrium interest rate and service volume in a perfect market ................. 16
Figure 4: The micro, meso and macro levels of the financial system........................... 25
Figure 5: Microfinance within the financial system - overcoming fragmentation?...........36
Figure 6: Funnel function of apex mechanisms........................................................ 38
Figure 7: Contractual network versus central contract party...................................... 52
Figure 8: PAP organisation chart............................................................................ 78
Figure 9: MSCL organisation chart......................................................................... 79
Figure 10: MSCL organisation chart, planned as of 2003...........................................83
Figure 11: K-Rep Group Ltd. organisation structure as of 2005.................................111
Figure 12: The dynamics of innovation in the industry life cycle................................156
Figure 13: Interrelation between industry, technology and product life cycles ............158
Figure 14: Interdependencies between LC models ..................................................159
Figure 15: GDP per capita 1975-2003 (US$), Kenya ...............................................170
Figure 16: Interest rates (nominal) development in Kenya 1999-2005, in %..............175
iv
Figure 17: Microfinance borrowers and savers in Kenya 1990-2004 ..........................176
Figure 18: Establishment of new MFIs in Uganda 1983-1999....................................194
Figure 19: Microfinance savers and active borrowers in Uganda................................196
Figure 20: PRESTO Project Organisational Chart 265
Figure 21: CMF Organisational Set-Up 267

Figures in the annexes:
Figure 22: CMF’s cascade approach of linking financial to non-financial services.........270
Figure 23: Organisational Structure of K-Rep 1987-92............................................282
Figure 24: Organisational Chart of K-Rep as of 1994...............................................284
Figure 25: JTL Network 1999-2003.......................................................................300
Figure 26: JTL solely working through VML 1999-2001............................................301
Figure 27: Graduating lending approach of JTL.......................................................308
Figure 28: MESP Programme Structure..................................................................314
Figure 29: MESP Project Implementation Unit (PIU)................................................315
Figure 30: MESP Strategy....................................................................................319
Figure 31: Graduating lending approach of MESP/T.................................................324

List of Boxes
Box 1: Stages of MSCL’s development.................................................................... 74
Box 2: Selection criteria to become a MSCL partner organisation............................... 85
Box 3: Categories of MSCL partner organisations..................................................... 86
Box 4: Stages of CMF's development ....................................................................104
Box 5: Stages of K-Rep’s development..................................................................110
Box 6: Stages of JTL’s development......................................................................120
Box 7: Stages of MESP/T’s development................................................................127

Boxes in the annexes:
Box 8: Characteristics of Ugandan MFIs in 1997.....................................................269
Box 9: Performance-based categorisation of CMF partner organisations.....................270
Box 10: Selection criteria for accessing CMF grants.................................................272

v
List of Acronyms

ACP African, Caribbean and Pacific Group of States
ADF African Development Fund
AfDB African Development Bank
AFMIN Africa Microfinance Network
AGM Annual General Meeting
AMFI Association of Microfinance Institutions
AMFIU Association of Microfinance Institutions Uganda
ASAL Arid and Semi-Arid Lands
ASAL CP ASAL Credit Programme
ASCA Accumulated Savings and Credit Associations
BDS Business Development Services
CAMEL Capital, Asset quality, Management, Earnings, and Liquidity
CBO Community Based Organisation
CEO Chief Executive Officer
CGAP Consultative Group to Assist the Poor
CIDA Canadian International Development Agency
CMC Credit Management Committee
CMG Credit Management Group
DFI Development Finance Institution
DfID Department for International Development
EBS Equity Building Society
EC European Commission, Commission of the European Union
ECA Economic Commission for Africa
EIB European Investment Bank
EU European Union
FFBS Family Finance Building Society
FSA Financial Service Association
GDP Gross Domestic Product
GIRAFFE GIRAFFE is a rating methodology used by PlaNet Finance composing of
Governance and Decision Making, Information and Management Tools,
Risks: Analysis and Control, Activities and Loan Portfolio, Funding: Debt
and Equity, Efficiency and Profitability
GoK Government of Kenya
GoU Government of Uganda
GTZ Gesellschaft für technische Zusammenarbeit
INAFI International Network of Alternative Financial Institutions
ISCB Institutional Support and Capacity Building
vi
JTL Jitegemee Trust Ltd.
KAS K-Rep Advisory Services
KDA K-Rep Development Agency
KGL K-Rep Group Ltd.
KIRDI Kenya Industrial Research and Development Institute
KPOSB Kenya Post Office Savings Bank
K-Rep Kenya Rural Enterprise Programme
KSh Kenyan Shilling
KSTES Kenya Small Traders and Entrepreneurs Society
KWFT Kenya Women Finance Trust
LC Life cycle
MCC Microfinance Competence Centre
MDGs Millennium Development Goals
ME Micro Enterprise
MESP/T Micro Enterprises Support Programme Trust
MFF Microfinance Forum
MFI Microfinance Institution
MFPED Ministry of Finance, Planning and Economic Development (Uganda)
MIX Microfinance Information eXchange
MOTI Ministry of Trade and Industry
MSCL Microfinance Support Centre Ltd.
MSE Micro and small enterprises
MSME Micro, small and medium enterprises
MTS Masaku Traders Association
NAO National Authorising Officer
NARC National Rainbow Coalition
NBFI Non-Bank Financial Institution
NCCK National Council of Churches of Kenya
NGO Non-Governmental Organisation
ODA Overseas Development Administration
PCEA Presbyterian Church of East Africa
PD&M Product Development and Marketing
PED Private Enterprise Development
PIU Programme Implementation Unit
PRESTO Private Enterprise Support, Training and Organisational Development
Project Project
PRIDE Promotion of Rural Initiatives and Development Enterprises
PSC Programme Steering Committee
vii
PSSC Programme Steering Sub Committee
RMSP Rural Microfinance Support Project
RNE Royal Netherlands Embassy
ROSCA Rotating Savings and Credit Association
RPE Rural Private Enterprise
SACCO Savings and Credit Cooperative
SHG Self-help group
SME Small and medium enterprises
SMEP Small and Micro Enterprise Programme
SSF Social System Framework
TCE Transaction Cost Economics
UIB Uganda Institute of Bankers
UN United Nations
UNDP United Nations Development Programme
USAID United States Agency for International Development
USh Ugandan Shilling
VML Vintage Management Services Ltd.
WEDCO WEDCO Enterprise Development Ltd.
WEREP Western Kenya Rural Enterprise Programme

viii
INTRODUCTION

“The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided
into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic
and social development from below. Lasting peace can not be achieved unless large population
groups find ways in which to break out of poverty. Micro-credit is one such means.”
The Norwegian Nobel Committee, October 13th 2006

October 13th 2006 made history. It did so for Professor Yunus and Grameen Bank,
and especially for all of the world’s poor and their struggle for access to finance.
Awarding a pioneer of microfinance and a microfinance bank the Nobel Peace Prize
recognised an innovation that, for about 30 years, has changed the lives of the many
landless women, urban families, micro entrepreneurs and retirees in developing
countries but also in the developed world. Small scale finance has allowed them to
invest in their micro businesses and contributed to increases in their earnings. Small
scale finance has allowed them to safeguard their finances and to have access to
liquid resources in emergencies. Thus, small scale finance was able to stabilise
unstable flows of income and expenditures of these poor households. It also
triggered investments in nutrition, education and social security systems and
contributed to the Millennium Development Goals1 (GTZ 2002, 2). However, the
recognition of microfinance through the Nobel Peace Prize holds promise and
challenge. Despite the achievement of reaching over 66 million poor clients by 2004
and the proof that sustainable microfinance is possible, the industry cannot be
complacent. More than one billion people worldwide still do not have access to
financial services (GTZ 2002, 1). While microfinance offers one solution to break out of
poverty, it is challenged to prove continuing success in diverse surroundings.

Having said that, the Prize does absolve neither the microfinance industry nor donor
agencies to challenge and change the fundamental structural constraints which
prevent poor women and men worldwide to make the best of small scale finance that
micro loans, savings and insurance services offer them. Especially in the light of the
second phase of the Microcreditsummit Campaign that will be launched in November
2006, the Prize might well trigger donor agencies to throwing money at
microfinance. In face of this challenge, it is crucial to examine the existing devices
for channelling support to microfinance. It is within that context that this research
sets out to examine one devise for channelling support to microfinance in developing
countries. In particular, this research examines apex mechanisms.

1 In September 2000, at the United Nations Millennium Summit, world leaders agreed to a set of
measurable goals and targets for combating poverty, hunger, disease, illiteracy, environmental
degradation and discrimination against women to be reached by the year 2015. For example, extreme
poverty and hunger shall be halved by 2015. Together 8 goals, they are termed the “Millennium
Development Goals” (MDGs). http://www.un.org/millenniumgoals
1