Towards financial inclusion? A study of the co-operative and digital lending models in Kenya

Abstract

Financial inclusion emerged around the mid-2000s as a developmental strategy that proposed the tailoring of financial services of different kinds to the poor as a means of tackling poverty and inequality. This thesis examines how financial inclusion plays out through the extension of credit to people in Kenya. Besides the traditional banking institutions, there are two important credit providers in Kenya, namely co-operatives and digital lenders. On the one hand, the co-operative sector has a long history in Kenya and has witnessed significant developments over the last two decades. On the other hand, digital lenders have a more recent history but have quickly grown to become significant players in the credit industry. Co-operatives in Kenya began in the colonial period with white settler farmers who brought along the model from Britain where it began. A few decades later, disenfranchised smallholder farmers under the yoke of colonialism were allowed to form co-operatives for their mutual benefit. After independence, the government fashioned co-operatives as a conservative form of African socialism which proved largely successful compared to other aggressive forms of African socialism practiced elsewhere in Africa. Co-operatives have become an enduring feature in Kenya’s credit industry, offering inexpensive loans. The genius of the co-operative model is that it dispensed with the need for collateral in favour of guarantees by co-members. Co-operatives have transformed significantly since deregulation of the sector from government control in 1997. The most significant of these changes was the emergence of financial co-operatives which are more formally known as Savings and Credit Co-operative Organizations (SACCOs) and the opening of the common bond and offering of quasi-banking services, all of which took place from the late 2000s. Notably, these changes inspired the innovation of new products and services, including digital loans, making co-operatives assume a more commercial outlook, a significant departure from their solidarity roots. Although opening of the common bond in SACCOs has led to an uptick in the number of new members, this change has attracted only members with moderate to high incomes who are able to pay the minimum share capital and make periodic savings. Fundamentally, the changes in the sector have not made SACCOs more accessible to the people at the bottom of the pyramid. Around the same time that the co-operative sector was experiencing the changes highlighted above, mobile money, M-Pesa, was invented in Kenya. M-Pesa disrupted the financial services sector dramatically, forcing commercial banks to devise ways to cater to the lower end of the market whom the banks had ignored for a long time due to their lack of productive assets and savings and unstable wages. From 2012, commercial banks and other non-bank digital lenders have stepped in to offer unsecured digital loans, leveraging on the mature mobile money market and the fledgling credit rating industry. Over the last decade, digital lending has taken different forms and has transcended industries to include non-financial corporations that previously had no role in the provision of credit. This thesis shows that there are nuances in the use of and the benefit that users derive from digital loans. For high-income borrowers and to a lesser extent moderate-income borrowers, the loans are used as a convenience tool while low-income borrowers use digital loans for their day-to-day consumption needs and emergencies. While the loans can be useful when used for convenience purposes, they become predatory when they are used by low-income borrowers. That the changes in the co-operative sector and the promotion of mobile money and its spin-offs, including digital credit, happened around the same time that financial inclusion was gaining popularity is no coincidence. Notably, the financial inclusion discourse also took shape within the context of a global shift in financialization which also affected Kenya. This shift refers to a change from organizations making money from the production of goods to the current form of capitalism where they make ‘money from money’ by simply positioning themselves in the financial industry. The change in financialization has been facilitated by financial innovations which have made financial services, in this case digital credit, more accessible to users in the pursuit of profit. Proponents of the financial inclusion discourse proposed that financial service providers of all kinds should tailor and make their services more readily available to the poor, arguing that this will help the poor to forge their own paths out of poverty through entrepreneurship and to build their resilience through savings. This thesis argues that financial inclusion has little to do with borrowing for convenience and SACCOs gaining additional members with moderate to high incomes. This thesis argues that a deeper understanding of financial inclusion requires a departure from generalizations of financial inclusion in favour of a keen unpacking of financial inclusion strategies. Given that the targets of financial inclusion are typically the poor in the developing world, financial inclusion strategies must be sound and must not propagate or exacerbate the problems of poverty and inequality