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Attracting Microfinance Investment Funds: Promoting Microfinance Growth through Increased Investments in Kenya
Jeffrey Ben Matu
Duke University, International Development Program

18. April 2008

Online at http://mpra.ub.uni-muenchen.de/12084/ MPRA Paper No. 12084, posted 12. December 2008 17:42 UTC

Attracting Microfinance Investment Funds: Promoting Microfinance Growth Through Increased Investments in Kenya

Master’s Project Master of Arts in International Development Policy Terry Sanford Institute of Public Policy Duke University

Jeffrey Ben Matu
Principal Policy Advisor Dr. Graham Glenday

April 18, 2008

Acknowledgements
This paper could not have been written without Dr. Graham Glenday who not only served as my policy advisor, but also encouraged and challenged me to do my best. I would also like to thank my other committee members; Dr. Cory Krupp and Dr. Rosemary Fernholz for patiently guiding me through the writing process and for their suggestions and continued support. To my family and friends, I thank you for your encouragement with reading and commenting on the paper. And to my wife Sharon, for believing in me and encouraging me to never accept less than my best efforts. Finally I would like to thank Jennefer Sebstad, Leila Webster, Stefan Staschen, and Jerry Grossman for reading and making comments on my drafts. Thank you all.

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Table of Contents
List of Acronyms…………………………….…………………………………………….……………………...5 Executive Summary……………………………………………………………………….……………………..6 1. Introduction…………………………………………………………………..………………………………7 2. Background……………………………………………………………..…………………………………….7
2.1. 2.2. 2.3. 2.4. Microfinance Sector……………………………………………………………………………………...7 Sociopolitical……………………………………………………………………………………………...10 Investment Climate………………………………………………………………………………………13 Economic Sector………………………………………………………………………………………….14

3. Problem Statement………………………………………………………………………………………….17
3.1. 3.2. 3.3. 3.4. Policy Question…………………………………………………………………………………………...17 Problem Definition……………………………………………………………………………………….17 Stakeholder Analysis……………………………………………………………………………………..18 Policy Goals and Objectives……………………………………………………………………………..22

4. Implication of Existing Microfinance Environment……………………………………..…………22
4.1. 4.2. 4.3. 4.4. Self-governance Challenges…………………………………………………………………………......22 Capacity Building Issues………………………………………………………………………………...23 Non-compliance Reporting Requirement………………………………………………………………23 Un-standardized Performance Criteria………………………………………………………………...23

5. Assessment of Microfinance Investment Funds……………………………………..………………24
5.1. 5.2. 5.3. 5.4. 5.5. Range of MIF Investors………………………………………………………………………………….24 Categories of MIFs…………………………………………………………….…………………………25 Financial Sources of MIFs……………………………………………………………………………….26 Portfolios of MIFs Invested in Africa…………………………………………………………………...27 Social Responsible Investments………………………………………………………………………....28

6. Analysis of Factors that Affect Location Decisions of MIFs……………………………………...29
6.1. Case Study of MIFs in Africa……………………………………………………………………………30 6.2. Implication of Analysis…………………………………………………………………………………..34

7. Policy Alternatives………………………………………………………………………………………….36
7.1. 7.2. 7.3. 7.4. 7.5. Evaluation Criteria……………………………………………………………………………………....36 Description of Alternatives……………………………………………………………………………...36 Preferred Policy Alternative…………………………………………………………………………….38 Implementation Plan………………………………………………………………………………….....40 Monitoring and Evaluation……………………………………………………………………………..42

8. Policy Implication…………………………………………………………………………………………..42 9. Conclusion……………………………………………………………………………………………………43 10. Bibliography…………………………………………………………………………………………………44 Annexes……………………………………………………………………………………………………..(48 – 63)
Problem Tree Analysis Stakeholder Matrix List of AMFI Members Kenya’s Demographic Data Evaluation of Alternatives Impact of Policy Alternatives Analysis of Policy Alternative on MFIs and MIFs Policy Outcomes List of MIFs Invested in Africa Doing Business Index

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List of Figures and Tables
Figures
Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: Figure 13: Figure 14: Figure 15: Figure 16: Figure 17: Figure 18: Figure 19: Figure 20: Microfinance structure and MFI market share in Kenya Distribution of financial services in Kenya Extrapolated labor distribution in the economy Share of income distribution by household groups Percentage of rural-urban population with access to mobile phones Supply and demand model of MFI transaction costs Sectors where the labor force is participating NSE 20 Share Index and Market Capitalization Stakeholder mapping Structure of vehicles that channel capital Range of MIF investors & their lending instruments Share of MIF financing Distribution of MIF activities Country of incorporation for MIFs in Africa Government participation and corruption perceptions Analysis of investment freedom Protecting investors against misuse of corporate assets Legal hurdles in incorporating and registering a new business Financial market sophistication Benefits of policy alternatives pg. 8 pg. 9 pg. 10 pg. 11 pg. 12 pg. 13 pg. 15 pg. 17 pg. 21 pg. 24 pg. 24 pg. 26 pg. 28 pg. 29 pg. 31 pg. 33 pg. 33 pg. 33 pg. 34 pg. 39

Tables
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Population size, population density, and annual growth rates of Kenya Extrapolated labor distribution in the economy Foreign investment requirements in Kenya Description of stakeholder attributes Description of capacity building issues Amount of MIF financing Amount of MIF financing to Sub-Saharan Africa Total assets and the size of microfinance portfolios (2007) Percentage change of total assets in Africa (2007) Description of Coface country rating Description of the benefits for the preferred policy options pg. 10 pg. 10 pg. 14 pg. 18 pg. 23 pg. 26 pg. 26 pg. 27 pg. 27 pg. 31 pg. 42

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List of Acronyms
AIMS – Alternative Investment Market Segments AMFI – Association of Microfinance Institutions ATMs – Automated Teller Machines BEE – Black Economic Empowerment CBK – Central Bank of Kenya CCK – Communications Commission of Kenya CGAP – Consultative Group to Assist the Poor CPI – Corruption Perception Index DFID – Department for International Development FIMS – Fixed-Income Securities FSD – Financial Sector Deepening G8 – Group of Eight GCR – Global Competitiveness Report GDP – Gross Domestic Product GoK – Government of Kenya HDR – Human Development Report ICT – Information and communication technology IFC – International Finance Corporation KCB – Kenya Commercial Bank KEMCAP – Kenya Microfinance Capacity Building Program KIA – Kenya Investment Authority KNBS – Kenya National Bureau of Statistics KPOSB – Kenya Post Office Savings Bank (Postbank) Kshs – Kenyan Shilling MFI – Microfinance Institutions MIF – Microfinance Investment Funds MIMS – Main Investment Market Segments MoF – Ministry of Finance MoIC – Ministry of Information and Communication MoTI – Ministry of Trade and Industry MSE – Micro and Small Enterprise NBFI – Non-Bank Financial Institution NGOs – Non-governmental Organizations NSE – Nairobi Stock Exchange POS – Point of Sale SA – South Africa SACCO – Savings and Credit Co-Operative SID – Society for International Development SIDA – Swedish International Development Cooperation Agency SME – Small Medium Enterprises SOE – State-owned Enterprises SRI – Social Responsible Investment TA – Technical Assistance TI – Transparency International UN – United Nations UNDP – United Nations Development Programme USAID – United States Agency for International Development WB – World Bank WDI – World Development Indicators

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Executive Summary
Although microfinance has played a significant role in providing a wide range of financial products and services, many microfinance institutions (MFIs) in Kenya still face major challenges with efficiently and effectively delivering microfinance services in the country. As the demand for these services continues to grow, the limited sources of available capital have greatly undermined the capabilities of MFIs to efficiently operate their services and expand their various microfinance activities.1 This has led to a financial gap in the supply of microfinance services, and consequently has reduced the opportunities for the poor to access basic socio-economic benefits that could potentially improve their wellbeing. The widening financial gap in the microfinance sector has been attributed to selfgovernance issues, capacity building issues, non-compliance with reporting requirements, and a lack of appropriate performance criteria. These and other factors have jeopardized MFIs sustainability and have compromised the delivery of microfinance services in the country. While the Association of Microfinance Institutions (AMFI) has been playing a vital role in promoting the growth and development of microfinance through building the capacity of MFIs, the organization still faces challenges in its efforts to promote sustainable, efficient, and effective delivery of microfinance services. There is a need for a policy that advocates for better access to capital sources and investment opportunities for microfinance sustainability, and also encourages MFIs to increase their accessibility, build capacity, be more transparent, adopt acceptable performance standards, and promote professionalism to enhance service delivery. This paper analyzes three policy alternatives which include: (i) maintaining the status quo, (ii) government regulation of all MFIs, and (iii) voluntarily self-regulating by member MFIs as alternatives for closing the financial gap in the supply of microfinance services. All the three alternatives are evaluated against the following criteria: efficiency, financial and political feasibility, and accessibility to determine the best policy option. Based on the evaluation criteria, combining government and self-regulation policies offer the best prospects for ensuring a favorable microfinance environment is created in Kenya. In addition, combining the two policies offer MFIs opportunities to raise their efficiency and effectiveness in delivering microfinance services, while offering the Government of Kenya an opportunity in freeing up resources for development in the country.2 Overall, the policy alternative of combining government regulation and selfregulation policy has the greatest potential in addressing the limited sources of capital that is undermining the capabilities of MFIs in Kenya to efficiently operate and expand their microfinance activities.

According to the Problem Tree analysis of the microfinance sector in Kenya, the root causes that have mainly contributed to the financial gap include the following: weak capacity building procedures, lack of performance criteria, weak transparency and accountability systems, and weak regulatory framework that have greatly undermined the capabilities of MFIs to effectively operate and expand their activities (see Annex a). 2 see Annex e: Evaluation of Alternatives

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1. Introduction
This paper explores the feasibility of microfinance investment funds (MIF) as key drivers for channeling alternative sources of funding to microfinance institutions (MFIs) and in helping with the expansion of microfinance in Kenya. As demand for microfinance services continues to grow, MFIs will have challenges in delivering microfinance services, which will adversely impact their future growth and development. The growing competition to access funding sources has led to a financial gap3 in supplying microfinance services, which is jeopardizing MFI sustainability in the country. In 2006, the Microfinance Act was passed to enhance the regulatory and legal framework for microfinance and to support the growth and development of microfinance in Kenya.4 This has greatly helped boost the sector resulting in increases in microfinance loan volumes, especially for deposit-taking MFIs such as Equity Bank, K-Rep Bank,5 and Jamii Bora. The ability of MFIs to collect deposits has some advantages, especially as the pool for alternative funding shrinks. Accordingly, the major arguments for attracting MIFs to incorporate or invest in the country is that in addition to channeling alternative sources of funds, it also supports MFIs in their early stages of development to grow and to be more attractive to investment opportunities.6 Although microfinance has been playing a significant role in providing a wide range of financial products and services, many MFIs in Kenya still face major challenges in their efforts to efficiently and effectively deliver microfinance services.7 A vast majority of the MFIs in Kenya are informal and unregulated,8 which has limited their funding sources further weakening their institutional capacity to supply microfinance services and limits their ability to grow.

2. Background
2.1. Microfinance Sector 2.1.1. Oversight Body Overseeing Microfinance In 1999, the Association of Microfinance Institutions (AMFI) was registered under the Societies Act as an umbrella organization to represent the microfinance institutions operating in Kenya. The AMFI’s activities were initially funded through a 3-year grant from the United States Agency for International Development (USAID), which aimed to support the growth and development of MFIs, by promoting sustainable, efficient, and
Financial gap is defined as the difference between the existing supply of financial services and the actual ‘formal’ financial services supply required in the country (see Figure 2). 4 (2006). The Microfinance Act, 2006. C. B. o. Kenya. Nairobi, The Government Printer. No. 19: 589. 5 CGAP (2008). The Rating Fund: The Microfinance Rating and Assessment Fund, Consultative Group to Assist the Poor. 6 Devaney, P. L. (2006). Omidyar Network and the SEEP Network Microfinance Investor Roundtable: Major Themes and Next Steps. Microfinance Investor Roundtable. P. L. Devaney. Washington, D.C.: 6 pages. 7 FSD (2007). Financial Access in Kenya: Results of the 2006 National Survey. FinaAccess Study. finaccess. Nairobi, Financial Sector Deepening (FSD) Kenya: 44 pages. 8 Omino, G. (2005). Regulation and Supervision of Microfinance Institutions in Kenya. C. B. o. Kenya, IRIS Center. 3

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effective delivery of microfinance services. Further, AMFI aimed to organize a network of MFIs in the country who were committed to developing and making available a wide array of microfinance services to those who needed it, especially those whose needs were unmet by the formal financial sector.9 AMFI has been playing a vital role in promoting the growth of microfinance in Kenya in addition to supporting MFIs to build capacity in order to overcome some of the challenges facing the sector. AMFI was instrumental in drafting and preparing the Microfinance Bill, which was passed and enacted into law in 2006.10 2.1.2. Microfinance Institutions While Kenya has more than 25011 organizations that practice some form of microfinance business, only 20-practice pure microfinance, of which 3 are deposit-taking and 17 are credit only. The remaining 230 MFIs combine microfinance with social welfare activities.12 According to the Microfinance Act,13 MFIs in Kenya are classified into three different tiers, with the first tier being deposit-taking institutions such as banks, the second tier being credit only facilities, and the third tier being informal organizations supervised by an external agency other than the government.14 These distinct classifications have led to some of the MFIs specializing in certain niche markets, which have contributed to their growth and sustainability in delivering microfinance. For example, the ability to collect deposits has enable Equity Bank to appeal to those excluded by the high the high costs of accessing traditional banks,15 while Jamii Bora has identified itself as the financial provider to former thieves and beggars.16
Figure 1: Microfinance structure and MFI market share in Kenya

Source: (Omino 2005)

USAID/Kenya. (2003). "The Association of Microfinance Institutions." Agriculture and Microenterprise Development Retrieved 2/2, 2008, from http://www.usaidkenya.org/ke.agbuen/activities/microfinance.html. 10 Ibid. 11 SantaMaria, A. (2007). "Microfinance Regulations in Kenya." MicroFinance Sector Retrieved 1/28, 2008, from http://www.parismfn.org/parismfn/2007/in_kenya_there_.html. 12 Omino, G. (2005). Regulation and Supervision of Microfinance Institutions in Kenya. C. B. o. Kenya, IRIS Center. 13 (2006). The Microfinance Act, 2006. C. B. o. Kenya. Nairobi, The Government Printer. No. 19: 589. 14 Omino, G. (2005). Regulation and Supervision of Microfinance Institutions in Kenya. C. B. o. Kenya, IRIS Center. 15 Johnson, S., M. Malkamaki, et al. (2006). "Tackling the 'Frontiers' of Microfinance in Kenya: The Role for Decentralized Services." Small Enterprise Development 17(3): 13 pages. 16 Microcredit (2008) Beggars, Savers and Borrowers: The 'Good Families' of Jamii Bora. Microcredit Summit E-News Volume, DOI: March 2008

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In 2007, Kenya received global recognition during the Group of Eight (G8) summit in Berlin for the progress made in the microfinance sector. On behalf of the sector, James Mwangi of Equity Bank was honored at the summit with the 2007 Global Vision Award on Microfinance,17 a considerable milestone, which has highlighted the success of microfinance in the country. 2.1.3. Challenges in Microfinance Despite the enactment of the Microfinance Act, AMFI still faces challenges in building the capacity of the microfinance sector and reducing the inefficient delivery of microfinance products and services. Furthermore, the continued success and rapid growth of microfinance has led to a financial gap in the funding needed to meet the growing demand.18
Figure 2: Distribution of financial services in Kenya

Source: (FSD 2007)

This could seriously impact the ability of Kenyans to access the financial resources needed to obtain basic socio-economic benefits such as education, healthcare services, land ownership, income generating activities, and credit facilities. A study on the financial sector found that 35.2 percent of Kenyans in need of financial services, where unable to access the formal financial services.19 In addition, there was another 30.2 percent who are entirely excluded from accessing any financial services (see Figure 2). This has greatly undermined the overall wellbeing of the poor people by limiting their opportunities to improve their socio-economic status.

17 18

Ombara, O. (2007). Equity Bank CEO to Address G8 Meeting. The Standard. Nairobi, The Standard Group.

FSD (2007). Financial Access in Kenya: Results of the 2006 National Survey. FinaAccess Study. finaccess. Nairobi, Financial Sector Deepening (FSD) Kenya: 44 pages. 19 Ibid.

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2.2. Sociopolitical Setting 2.2.1. Demographics According to the World Development Indicators (WDI), Kenya’s population was estimated at 35,143,188 in 2006, which represented a percentage change increase of 17.9 percent from the 2000 population results.20 In addition, the demographic data from WDI found that in 2006, Kenya’s population was growing at a rate of 2.42 percent per annum21 and it is estimated that the projected population will reach 38,929003 by 2010 if the current growth rate continues. The urban population growth rates are significantly higher than the national growth rate for the period 2000-2006 at 5.94 percent, while the rural population growth rates are far below the national average for the same period.22 The population density in Kenya is about 62 people per square kilometer with about 79 percent of the population living in the rural areas and the remaining 21 percent live in the urban areas. Additionally, approximately 54.4 percent of Kenyans are in the age group 15-64. The population is young, with 42.8 percent of the population aged 0-14 years and only 2.8percent aged 65 years and over (see Annex d).23
Table 1: Population size, population density, and annual growth rates of Kenya (1990 – 2006) Population distribution
Rural population Urban population Total Population

Population
2000 24643533.6 6045798.404 30689332 2006 27763118.15 7380069.381 35143187.53

Annual growth rate (%)
1990-2000 -3.20% -3.66% 3.10% 2000-2006 0.97% 5.94% 2.42%

Population density (pple/sq. km)
2000 43.29 10.62 53.91 2006 48.77 12.96 61.74

Source: (WDI 2007)

2.2.2. Labor and Employment The WDI data on labor and employment take into consideration the gender distribution in agriculture, industry, and services and factor it as a percentage of the total male or female in employment. In Kenya, the service sector is the largest contributor to GDP comprising more than 67.6 percent of the total share of the economy, while agriculture is 16.6 percent and industry is 16.52 percent.24
Table 2: Extrapolated labor distribution in the economy Distribution Percentage Employees, agriculture, female (% of female employment) 12.39 Employees, agriculture, male (% of male employment) 20.81 Employees, industry, female (% of female employment) 9.40 Employees, industry, male (% of male employment) 23.64 Gender Distribution of Labor in the Economy
Employees, services, female (% of female employment) Employees, services, male (% of male employment)
Source: (WDI 2007)

Figure 3: Extrapolated labor distribution in the economy
Em ploym in ent agriculture (%of total em ploym ent) Em ploym in industry ent (%of total em ploym ent) Em ploym in serv ent ices (%of total em ploym ent)
Source: (WDI 2007)

79.56 55.63

20 21 22 23

WDI (2007). Kenya's Population Size and Population Distribution, World Bank. Ibid. Ibid. Ibid.

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However, based on Kenya’s national survey by Financial Sector Deepening (FSD), a majority of the population is dependent on agriculture for employment.25 Although the service sector accounts for more than 67.6 percent of GDP, about 75 percent of the population is employed in the agricultural sector.26 The labor participation rate as a percentage of the total population (15 years and over) is 81 percent, the participation rate for men is much higher at 90 percent while female’s participation rate is below the total average at 71 percent (see Table 2).27 2.2.3. National Income Distribution A study by the Society for International Development (SID) found that the distribution of income in Kenya was extremely uneven and the rich controlled a large portion of the national income. According to the study, 42 percent of the national income in the country was in the hands of 10 percent of the richest households, while only 0.76 percent of the national income was in the hands of the lowest 10 percent.28 The study also found that in terms of Kenyan shilling that “for every one shilling earned by the lowest 10 percent, the highest 10 percent earned more than Kshs 56.” Additionally, when the income groups are subdivided into ten cumulative percentages of household income groups, the gini coefficient, which measures the inequality of income distribution, was 0.571.29
Figure 4: Share of income distribution by household groups

Source: (Odhiambo 2004)

2.2.4. Information and Communications Technology The rapid growth of information and communications technology (ICT) in Kenya has facilitated innovative ways for delivering financial services in addition to changing the methods of payment, which has helped with the expansion of microfinance in the country. Services such as M-Pesa allow mobile phone users with pre-paid accounts to
24 25 Ibid.

FSD (2007). Financial Access in Kenya: Results of the 2006 National Survey. FinaAccess Study. finaccess. Nairobi, Financial Sector Deepening (FSD) Kenya: 44 pages. 26 FFP (2006). Kenya's Economic Indicators. Country Profiles, The Fund for Peace. 27 WDI (2007). Kenya's Population Size and Population Distribution, World Bank. 28 Odhiambo, W. (2004). Pulling Apart: Facts and Figures on Inequality in Kenya. Nairobi, Society for International Development (SID): 85 pages. 29 Ibid.

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transfer money to anyone within their mobile network.30 For example, customers register with Safaricom for an M-Pesa account to activate their mobile phone to turn cash into emoney at Safaricom authorized dealers; this then would allow customers to use their mobile phones in making payments and transferring money to other customers within the Safaricom network.31 This has made it possible for MFIs to integrate services such as MPesa into their payment methods and this has in turn enhanced the distribution of microfinance loans and the collection of repayments of loans, which has greatly reduced the transaction costs. 2.2.5. Mobile Phones In terms of mobile phone access in Kenya, 26.9 percent of the population 18 years and above own a mobile phone.32 According to FSD Kenya’s 2006 national survey, 52.3 percent of the urban population owned a mobile phone, while almost half the number, about 18.6 percent reported owning a mobile phone in the rural areas. In addition, those who reported not owning a mobile phone still had access to one through a family member or a friend. The likelihood of using someone else’s mobile phone was much higher in the rural areas, where 29 percent were reported compared to 22.8 percent in the urban areas.33
Figure 5: Percentage of rural-urban population with access to mobile phones in Kenya
Access to Mobile Phones in Kenya
60.00%

50.00%

40.00% Own Use others No access

30.00%

20.00%

10.00%

0.00% Rural Mobile Phone Users Urban Mobile Phone Users Rural-Urban Population National Mobile Phone Users

Source: (FSD 2007)

2.2.6. Methods of Payment As a result of the rapidly growing ICT sector in Kenya, electronic payment methods such as: PesaPoint – an automated teller machine (ATM), Sokotele – a point of sale device (POS), cash-in cash-out services, credit cards, and M-Pesa have been gaining
Vodafone. (2007). "Safaricom and Vodafone Launch M-PESA, A New Mobile Payment Service." Retrieved 10/24, 2007, from http://www.sendmoneyhome.org/uploads/2007/02/vodafone-m-pesa-launch-final.pdf. 31 Hughes, N. and S. Lonie (2007). "M-PESA: Mobile Money for the “Unbanked” Turning Cellphones into 24-Hour Tellers in Kenya in Kenya." Innovations 2(1-2): 14 pages. 32 FSD (2007). Financial Access in Kenya: Results of the 2006 National Survey. FinaAccess Study. finaccess. Nairobi, Financial Sector Deepening (FSD) Kenya: 44 pages. 33 Ibid. 30

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prominence and most MFIs are hoping to utilize them as the preferred form of payment for their microfinance services due to their cost saving nature.34 According to the Governor of the Central Bank of Kenya (CBK), Professor Njuguna Ndung’u, the use of ICT solutions such as electronic payment methods has greatly benefited microfinance through the reduction of both the high fixed costs associated with running branches, mainly in rural areas, and lowering operating costs for MFIs through sharing their point of services with other vendors.35 In addition, the recent CBK microfinance prudential regulation proposals aim to further facilitate sharing agreements with non-bank vendors such as retail shops, supermarkets, pharmacies, and gas stations, which would improve transaction costs and result in increases of microfinance services in Kenya.36 In view of these proposed microfinance prudential regulations, if the transaction cost (S) of delivering microfinance fell to (S1), the price of microfinance products and services (P) would fall to (P1), resulting in an increase in the number of microfinance products and services being sold (this assumes a fairly competitive market for microfinance products).37
Figure 6: Supply and demand model of MFI transaction costs Transaction Costs
Price (P) S S1 P P1 (P1) MFI price when ICT and sharing agreements are present (P) MFI price in the absence of ICT and sharing agreements

D

Q
Source: (Miller 2006)

Q1

Quantity (Q)

2.3. Investment Climate Kenya has had a long history of economic leadership in East Africa and is one of the largest and most advanced economies in the region.38 All investors investing in the country receive equal treatment and their investment activities are governed under the

34

Pickens, M. (2007) Moving Beyond Bank Walls: Notes on Regulation of Branchless Banking in Kenya. CGAP - Technology Program Volume, 19 pages DOI: November 2007 35 Ngung'u, N. (2007). Proposed Microfinance Prudential Regulations. Workshop to Review the Proposed Microfinance Prudential Regulations, Kenya School of Monetary Studies, Nairobi, Central Bank of Kenya. 36 Ibid. 37 Miller, R. L. (2006). Economics Today. Boston, Pearson Addison-Wesley. 38 USA.gov (2007). 2007 Investment Climate Statement - Kenya. D. o. State. Washington.

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Investment Promotion Act 2004.39 The law provides the administrative and legal procedures to achieve a more effective investment climate. The law sets the following requirement for foreign investors:
Table 3: Foreign investments requirements in Kenya The minimum foreign investment threshold at $500,000 Investors must receive an investment certificate from Kenya Investment Authority (KIA) Foreign employees are expected to be key senior managers or have special skills not available locally Foreign investors are required to sign an agreement with the government stating training arrangements for phasing out expatriates Any enterprise, whether local or foreign, may recruit expatriates for any category of skilled labor if Kenyans are not available Work permits are required for all foreign nationals wishing to work in the country
Source: (USA.gov 2007)

2.3.1. Business Forms Foreign firms establishing Kenyan subsidiaries usually choose the private limited liability company, as the laws regulating their establishment and operation are less stringent. There are no restrictions on exit procedures for a branch of a non-resident company except that a branch must be registered.40 2.3.2. Business Environment According the Heritage Foundation’s Index of Economic Freedom 2008, the overall business environment in Kenya in terms of doing a business is “relatively well protected by Kenya’s regulatory environment.”41 Kenya is ranked 71st out of 178 countries in the ease of doing business, where starting a business takes an average of 57 days, compared to the world average of 43 days.42 In term of Economic Freedom, Kenya is ranked 82nd out of 157, where investment freedom and freedom from government (share of government in the economy) received a score of 50 percent and 84.8 percent respectively. This has resulting in Kenya receiving a country rating of C (see Annex m).43 2.4. Economic Sector 2.4.1. Employment Sectors The Kenya National Bureau of Statistics (KNBS) 2005-06 labor force survey found that of the 18.8 million Kenyans in the age group 15-64, 13.5 million were actively

39 40

GoK (2004). Investment Promotion Act 2004. M. o. Finance. Nairobi, Government Printers: 19 pages.

Deloitte. (2006). "Kenya Snapshot." International Tax and Business Guides Retrieved 3/4, 2008, from http://www.deloittewebguides.com/index.asp?layout=countrySnapshotDtt&country_id=250000025&rf=0. 41 (2008). Index of Economic Freedom, Heritage Foundation. 42 DBI (2008). Doing Business Index, World Bank. 43 Coface (2008). Country Ratings, The Coface Group.

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participating in the labor force. The population actively participating in the labor force can be subdivided into three sectors; agricultural, formal, and the Jua Kali sectors.44
Figure 7: Sectors where the labor force is participating
Employment Sectors 60% 50%

40% 30%

Employment Sectors

20% 10%

0% Agricultural

Jua Kali

Formal

Source: (Pollin, Githinji et al. 2007)

2.4.2. Agricultural Sector The 2005-06 labor force survey by KNBS found that “officially” more than 50 percent of the actively participating labor force in Kenya was employed in the agricultural sectors where approximately 6.75 million Kenyans,45 though other “unofficial” estimates show a much higher percentage engage in the sector. The agricultural sector is where the majority of Kenyans are employed and it plays a significant role for rural households.46 2.4.3. Formal Sector According to the survey by KNBS, the formal sector accounts for the smallest share of actively participating labor force in the country and represents about 14 percent of total employment, which is 1.89 million.47 The formal sector is officially recognized by the Government of Kenya (GoK) and those employed pay a tax on the salaries they earn. 2.4.4. The Jua Kali Sector “Jua Kali” means “hot sun” and was once synonymous with people who worked long hours under the sun making handicrafts as a means of livelihood. Over time, the term Jua Kali has been broadened to include all forms of livelihood (non-agricultural) that are not officially registered by GoK to operate in the economy. Hence, Jua Kali literally means the informal economy. Further, according to internationally accepted

44 45 46

Pollin, R., M. w. Githinji, et al. (2007). An Employment-Targeted Economic Program for Kenya. Brazilia, UNDP. Ibid.

FSD (2007). Financial Access in Kenya: Results of the 2006 National Survey. FinaAccess Study. finaccess. Nairobi, Financial Sector Deepening (FSD) Kenya: 44 pages. 47 Pollin, R., M. w. Githinji, et al. (2007). An Employment-Targeted Economic Program for Kenya. Brazilia, UNDP.

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definitions, Jua Kali can also describe self-employment in non-agricultural activities and is used as a key indicator for the informal economy.48 According to the KNBS, the Jua Kali sector accounts for 36 percent of total employment and it employs more than 4.86 million people. A large number of workers in the Jua Kali sector work more than 40 hours per week with low pay.49 As per the survey, a majority of these people are unable to support themselves and their families. 2.4.5. The Banking System The role of the traditional banking institutions in Kenya is to channel funds from households, firms, and governments with excess savings to those who have a shortage of investable funds.50 Similarly, MFIs provide financial services, primarily savings and credit to the poor who do not have access to the traditional banking institutions.51 The innovative lending strategies of MFIs in providing microcredit and other financial services to the poor are often considered a challenge to traditional financial institutions.52 Products and services offered by both the traditional financial institutions and MFIs in Kenya are similar and include the following: loans, savings and deposit, payment services, insurance, money transfer, and non-financial services The key difference is the smallness of products and services offered by MFIs. Other features that distinguish microfinance services from those provided by the traditional financial institutions include the absence of collateral to access services and the simplicity of MFI operations that use innovative ICT solutions.53 The conventional wisdom is that MFI services are expected to force the traditional institutions to pay greater attention to the banking needs of the poor. However, despite the presence of the MFI institutions, the traditional banking system in Kenya continues to only serve a small proportion of the market, largely ignoring those considered “unbankable” such as poor households (see Figure 2). 2.4.6. Nairobi Stock Exchange Kenya’s capital market sector has been growing rapidly and has developed into a sophisticated financial system, which is ranked 48 out of 131 economies.54 The 20072008 Global Competitiveness Report (GCR) ranked the quality of Kenya’s business environment 52 out of 131 and the overall business competitiveness was ranked 62. The role of the capital markets in Kenya is essential for the financial sectors and they provide financing opportunities for enterprises.55
Fairbourne, J. S., S. W. Gibson, et al. (2007). MicroFranchising : creating wealth at the bottom of the pyramid. Cheltenham, UK ; Northampton, MA, Edward Elgar. 49 Pollin, R., M. w. Githinji, et al. (2007). An Employment-Targeted Economic Program for Kenya. Brazilia, UNDP. 50 Mishkin, F. S. (2006). The economics of money, banking, and financial markets. Boston, Addison Wesley. 51 CGAP. "Definition of Microfinance Institutions." Retrieved 2/15, 2008, from http://www.cgap.org/portal/site/CGAP/menuitem.5cb3955e9924016067808010591010a0/ 52 Johnson, S. (2004). "The Impact of Microfinance in Local Financial Markets: A Case Study from Kenya." Journal of International Development 16(3): 34 pages. 53 Vodafone. (2007). "Safaricom and Vodafone Launch M-PESA, A New Mobile Payment Service." Retrieved 10/24, 2007, from http://www.sendmoneyhome.org/uploads/2007/02/vodafone-m-pesa-launch-final.pdf. 54 GCR (2007). The Global Competitiveness Report 2007-2008. Global Competitiveness Report: Country Economic Analysis, World Economic Forum. 55 GoK (2002). The Capital Markets Act (CAP 485A). CMA. Nairobi, Ministry of Finance: 6 pages. 48

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Kenya’s capital market under the Nairobi Stock Exchange (NSE) has undergone unprecedented growth, with the equity and bond issuance reaching an all time high. The NSE currently has 53 companies with equity listings in the Main and Alternative Investment Market Segments (MIMS and AIMS). Additionally, there is another listing for trading government and corporate bonds and other fixed-income securities (FIMS).56 The total equity market capitalization of these 53 companies as of July 31 2007 was Kshs. 811.23 billion.57
Figure 8: NSE 20 Share Index and Market Capitalization

Source: (NSE 2007)

3. Problem Statement
This paper explores the feasibility on MIFs and attempts to analyze the factors and policies that influence the location decision in terms of how they allocate their investments. Accordingly, this paper seeks to answer the following policy questions: 3.1. Policy Question i. What factors must be in place before an MIF can establish itself in a location and what role would it play in promoting the growth of MFIs? Can an MIF sustain itself, while offering both financial and social returns on investment to investors? ii. Is it necessary and feasible for an MIF to incorporate in Kenya and if so, what are some of the factors and policies that would influence the location decision of an MIF? 3.2. Problem Definition The growth of MFIs in Kenya has been met with challenges as the pool for funding continues to shrink mainly due to limited donor funds and growing competition in the microfinance sector in accessing those funds. The resulting financial gap in the country
NSE. (2007). "NSE Listed Companies and Market Capitalization." Listed Companies Retrieved 11/2, 2007, from http://nse.co.ke/newsite/inner.asp?cat=companies. 57 NSE. (2007). "NSE Monthly Statistical Bulletin." Market Statistics Retrieved 11/2, 2007, from http://nse.co.ke/newsite/inner.asp?cat=sbullet. 56

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for sustaining microfinance activities has necessitated the need for MFIs to seek alternative sources of funding for their growth and financial sustainability. 3.2.1. Why is there a financial gap for sustaining microfinance activities? According to the Problem Tree analysis of the microfinance sector in Kenya, the root causes that have mainly contributed to the financial gap include the following: weak capacity building procedures, lack of performance criteria, weak transparency and accountability systems, and weak regulatory framework that have greatly undermined the capabilities of MFIs to effectively operate and expand their activities (see Annex a). Therefore, the limited sources of available capital have greatly undermined the capabilities Therefore, the limited sources of available capital have greatly undermined the capabilitiesKenya to in Kenya tooperate and expand their microfinance activities. of MFIs in of MFIs effectively expand their microfinance activities. 3.3. Stakeholder Analysis In addressing the above mentioned financial gap, a stakeholder analysis of the groups directly or indirectly involved in the microfinance sector will allow for better understanding of their resource needs and their interests. To understand the level of involvement relating to strategies for closing the financial gap in Kenya, stakeholders will be subdivided according to their power and salience in the Stakeholder Matrix based on the following attributes to guide their strategic responses (see Annex b):58
Table 4: Description of stakeholder attributes

Attributes Promoters: Stakeholders who attach a high priority to the reform policy a priority and whose actions can have an impact on the implementation of the policy. Defenders: Stakeholders who attach a high priority to the reform policy but whose actions cannot have an impact on the implementation of the policy. Latents: Stakeholders whose actions can affect the implementation of the reform policy but who attach a low priority to this policy. Apathetics: Stakeholders whose actions cannot affect the implementation of the reform policy and who attach a low priority to this policy.
Source: (WB 2001; WB 2008)

Stakeholders
AMFI, Tier 1 MFIs, Tier 2 MFIs, GoK, MoF, CBK, MoTI, FSD, MSE, USAID, DFID, SIDA, WB, IFC, SRI Investors/private sector, business community Tier 3 MFIs, KEMCAP, Excluded groups

KIA, NSE, SACCOs, KPOSB, Traditional Banks

MoIC, CCK

The following are key stakeholders involved directly or indirectly with the provision of microfinance services in Kenya: 3.3.1 Primary Stakeholders AMFI is interested in building the capacity of MFIs and reducing the inefficiencies in delivering microfinance services in the country.59 The prospect of additional sources of
WB. (2008). "Stakeholder Analysis." Public Sector Governance Retrieved 3/13, 2008, from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPUBLICSECTORANDGOVERNANCE/EXTANTICORRUPTION/0 ,,contentMDK:20638051~pagePK:210058~piPK:210062~theSitePK:384455,00.html. 59 USAID/Kenya. (2003). "The Association of Microfinance Institutions." Agriculture and Microenterprise Development Retrieved 2/2, 2008, from http://www.usaidkenya.org/ke.agbuen/activities/microfinance.html. 58

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capital in the microfinance sector would help address some of the challenges facing most of the MFIs in their efforts to deliver microfinance services, while sustaining and expanding their activities. Tier 1 MFIs consist of the 3 deposit-taking MFI banks and they mainly rely on deposits and savings as their key source of raising capital for the provision of microfinance services. They are interested in alternative sources of capital to help meet the growing demand for microfinance services. Tier 2 MFIs consist of the 17 credit only MFIs who rely on loans that they provide at or close to market rates as their key source of raising capital for the provision of microfinance services. They are interested in alternative sources of capital to grow their loan portfolio in order to expand their microfinance activities. Tier 3 MFIs consist of the 230 smaller MFIs that focus on both microfinance and social welfare. They rely on charity and donor support as their key source of raising capital for their microfinance activities. They are interested in cheaper access to private capital to grow and sustain their programs. Traditional banks have access to various sources of capital to expand and sustain their financial activities, which include deposits and savings and investments services. The traditional banks are interested in alternative sources of capital, which can be used to grow their portfolio. Non-bank financial institutions (NBFI) such as Savings and Credit Co-Operatives (SACCOs) and Kenya Post Office Savings Bank (KPOSB or PostBank) rely on mobilizing deposits and savings as their main source of capital for sustaining their lending activities. These NBFIs are interested in alternative sources of capital that is long-term based, which can enable them to increase their loan portfolio. Private sector such as social responsible investors (SRIs), are interested in placing their investments where they can receive social and financial returns. They are mainly concerned with accurate and timely information, which they use to make their financial decision as to where to invest their money. Business community Micro and Small Enterprises (MSEs) and Small Medium Enterprises (SMEs) are interested in both investment opportunities and accessing additional sources of capital to grow their businesses. These groups are mainly concerned with accessing affordable capital that they can use to grow and sustain their business activities. Interest groups such as workers unions and cooperatives are interested in enhancing their socio-economic wellbeing through increased access to financial services. These interest groups are mainly interested in a wider range of financial products and services to meet their financial needs.

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Excluded groups from the financial sector make up 35.2 percent of Kenyans who are unable to access ‘formal’ financial services.60 This group faces challenges in accessing affordable financial services are forced to turn to informal financial providers such as family, friends, and money lenders, which has greatly hindered their ability to improve their socio-economic status. “Unbankable” groups in Kenya make up 30.2 percent of Kenyans who are unable to access any financial services.61 This group faces challenges in accessing basic socioeconomic benefits such as education, healthcare services, land ownership, income generating activities, and credit facilities that can help them improve their socioeconomic status.62 3.3.2 Secondary Stakeholders Public sector agencies such as CBK, Ministry of Finance (MoF), and the Ministry of Trade and Industry (MoTI) are interested in improving the policy environment to facilitate the growth and development of business. They are mainly concerned with ensuring that access to information and resources are adequate to support the delivery of microfinance services in the country. The prospect of attracting investments to the microfinance sector through policy would help with the expansion of microfinance in Kenya. Political groups such as Members of Parliament (GoK) are interested in ensuring that their constituents have access to economic opportunities through microfinance services. They are primarily concerned with the growing population that cannot access basic socioeconomic benefits that could potentially improve their status. Non-governmental organizations (NGOs) that provide social welfare are interested in increased access to financial services that could help enhance economic opportunities for many Kenyans. They are primarily concerned with affordable access to financial services. Civil society especially those representing the MSEs are mainly interested in increasing investment opportunities to help grow and sustain businesses. Other civil society groups such as FSD are interested in the growth and development of the financial markets to support wealth creation and reduce poverty.63 The civil society is primarily concerned with ensuring that the business environment is favorable for both the MSEs and for potential investors.

FSD (2007). Financial Access in Kenya: Results of the 2006 National Survey. FinaAccess Study. finaccess. Nairobi, Financial Sector Deepening (FSD) Kenya: 44 pages. 61 Ibid. 62 SID (2004). Pulling Apart: Facts and Figures on Inequality in Kenya: 85 pages. 63 FSD. (2005). "Who We Are." Financial Sector Deepening Kenya Retrieved 3/13, 2008, from http://www.fsdkenya.org/home/index.html.

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3.3.3 External Stakeholders International agencies (such as USAID, DFID, SIDA, WB, and IFC) are interested in the growth and development of microfinance in Kenya. They are primarily concerned with providing the necessary resources (loans, grants, guarantees, and technical assistance) that can help MFIs develop and grow their microfinance activities. Other public sector agencies (such as MoIC and CCK) are interested in providing ICT infrastructure that will facilitate the use and growth of technology in the country. These public sector agencies are mainly concerned with the efficient use of technology and the reduced cost savings in providing services that depend on ICT. 3.3.4. Explanatory Note of Stakeholder Analysis According to the stakeholder mapping, quadrants A, B, and D are the vital stakeholders in this policy reform and they have significant influence on the policy objectives. The summary of each quadrant is as follows: Quadrant A (Defenders): Stakeholders of high importance to the policy reform, but with low influence. Quadrant B (Promoters): Stakeholders who have a high degree of influence on the policy reform and are critical in the implementation process. Quadrant C (Apathetics): Stakeholders in this quadrant are those with low influence on the policy reform and whose interests are not the main target of this policy reform. Quadrant D (Latents): Stakeholders with high influence and who can affect the outcome of the policy reform, but whose interests is not the main target of this policy reform.
Figure 9: Stakeholder mapping

Source: (see Annex b)

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3.4. Goals and Objectives The goal of this paper is to ensure that a favorable microfinance environment to attract investments in Kenya is created. To achieve this above goal and deliver significant change in the microfinance sector, the following are recommended objectives: Increase capacity: Improving MFIs operation through continual training of staff and through organizational development to help address their capital and management constraints in addition to encouraging the growth of their services. The training process should encourage the development of professional managers in microfinance. Enhance information: Implementing procedures that will enhance accessibility of information on MFI activities. This will help ensure accurate information of microfinance services to reduce risks and improve performance. Increase performance: Implementing benchmarks for peer group evaluation and comparison with industry norms. This will ensure that MFIs are collecting and disseminating lessons learned and best practices to improve their overall performance. Enhance self-governance: Increasing accountability of MFIs by promoting selfregulation where MFIs act as checks-and-balances of how microfinance is delivered in the country. This will help assess MFIs on how well their social, environmental, and financial objectives are balanced and to ensure that MFIs are operating under acceptable industry norms.

4. Implication of Existing Microfinance Environment
The following are the outcomes of the existing microfinance environment in Kenya that has greatly undermined the capabilities of MFIs in efficiently operating their services and in expanding their microfinance activities. The outcomes of the current microfinance environment include: self-governance issues, capacity building issues, noncompliance to reporting requirements, and un-standardized performance criteria. 4.1. Self-governance Issues AMFI with its mission of “creating an all inclusive and influential regional network of financial institutions that provide quality microfinance services to low income people,”64 is a membership organization of MFIs in Kenya that promotes self-governance in the provision of microfinance services in the country. Although AMFI recognizes how vital microfinance is for the vast majority of Kenyans who lack access to financial services,65 it faces challenges in getting MFIs involved with the process of governing their delivery of microfinance services in the country. The current membership consists of 33 MFIs of the total 250 MFIs in the country (see Annex c).66 The lack of governance
64

AMFI. (2007). "Mission Statement." Association of Microfinance Institutions of Kenya (AMFI) Retrieved 2/2, 2008, from http://www.amfikenya.com/. 65 USAID/Kenya. (2003). "The Association of Microfinance Institutions." Agriculture and Microenterprise Development Retrieved 2/2, 2008, from http://www.usaidkenya.org/ke.agbuen/activities/microfinance.html. 66 AMFI. (2007). "Mission Statement." Association of Microfinance Institutions of Kenya (AMFI) Retrieved 2/2, 2008, from http://www.amfikenya.com/.

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criteria has weakened the ability of some of the MFIs to effectively deliver microfinance services, which has hindered them from achieving credible levels of accountability thus further jeopardizing their sustainability. 4.2. Capacity Building Issues Capacity building of MFIs refers to both the financial and non-financial capacity and deals with how MFIs manage their resources to effectively deliver microfinance.67 As the competition to deliver microfinance services continues to grow and the traditional banks venture into microfinance, MFIs face challenges in their outreach activities and maintaining their sustainability.68 The outcome of the competition is that as traditional banks begin providing microfinance services, MFI staff and clients are being poached by these banks, which has weakened both the financial and non-financial capacity of MFIs in Kenya.69
Table 5: Description of capacity building issues Financial capacity is the ability of a MFI to absorb and manage increased funds for loan disbursement. Non-financial capacity is the ability of a MFI to utilize institutional and human resources for skill development, information management systems, and networking opportunities with other microfinance service providers.
Source: (gdrc 2007)

4.3. Non-compliance Reporting Requirements The microfinance sector in Kenya has developed and grown in the absence of no regulatory oversight and non-compliance with reporting on their activities. Although this strategy has been beneficial for MFIs in the transformation stage, it is clear that there are some MFIs not operating on a sound basis.70 For example, the growing number of cases of pyramid schemes – “the get rich quick deposit taking outfits in which investors have lost billions of shillings.”71 The non-compliance with reporting on MFI activities not only compromises the sustainability of developing MFIs, it also costs MFIs in terms of securing money from private sources since many do not report their activities. 4.4. Un-standardized Performance Criteria The lack of appropriate performance criteria in the microfinance sector has led to uneven distribution of microfinance services, which is adversely impacting the scaling up of microfinance in the country. However, there are efforts underway by AMFI and the Kenya Microfinance Capacity Building Program (KEMCAP) to operationalize a performance monitoring system for MFIs in order to stimulate the development of the sector and provide consistency and accountability for delivery of microfinance.72

gdrc. (2007). "MFI Capacity Building." Microfinance Networks and Resource Centers Retrieved 3/5, 2008, from http://www.gdrc.org/icm/framework/frame-3.html. 68 Omino, G. (2005). Regulation and Supervision of Microfinance Institutions in Kenya. C. B. o. Kenya, IRIS Center. 69 Microskills. (2008). "Microfinance: Training and Capacity Building." Retrieved 3/5, 2008, from http://www.microskills.co.ke/trainings.html. 70 Mutua, A. (2007). Pyramid Schemes. O. o. G. Spokesperson. Nairobi, Office of Public Communications: 1 page. 71 Sambu, Z. (2007). Eight saccos deregistered in pyramid schemes crackdown Business Daily. Nairobi. 72 Ndung'u, N. (2007). Kenya Microfinance. The Kenyan Microfinance Conference, Strathmore University, Nairobi, CBK.

67

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5. Assessment of Microfinance Investment Funds
Microfinance investment funds are specifically created vehicles which have been set up to invest in microfinance assets and in which social or commercial, private or institutional investors can potentially invest their capital.73 These vehicles allow for the pooling of investor capital that is made available for lending to MFIs, generating benefits to investors when they are repaid.
Figure 10: Structure of vehicles that channeling capital

Source: (Matthäus-Maier, Von Pischke et al. 2006)

5.1. Range of MIF Investors According to Patrick Goodman’s presentation at the 2004 Financial Sector Development Symposium in Berlin, the main types of MIFs investors fall under the following four categories; private donors, development agencies, private individuals, and institutional investors (see Annex i).74 These investors use a variety of lending instruments such as grants, subsidized loans, loans at or close to market rates, equity participation, guarantees, and technical assistance (TA) as means of supporting the microfinance sector. These investors include the following:
Figure 11: Range of MIF investors and their lending instruments

Source: (Matthäus-Maier, Von Pischke et al. 2006)

73

Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank. 74 Ibid.

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Private Donors such as Foundations and NGOs usually support microfinance sectors through providing lending that is much closer to the market interest rate. Sometimes they provide subsidized lending at little or no interest rate. Development Agencies such as the bilateral and multilateral agencies usually support microfinance sectors through providing lending instruments that are similar to private donors and additional they take equity stakes in their investments. Private Individuals such as shareholders usually support microfinance sectors through participating in social investments instruments products such as loan instruments or taking equity stakes in their financial investments. Institutional Investors such as pension funds, insurance companies, mutual and investment funds usually support microfinance sectors by investing their asset portfolios in microfinance or by setting up their own dedicated investment funds that provides lending instruments such as loans and equity stakes. 5.2. Categories of MIFs In order to distinguish the categories of MIFs that are available for microfinance, MIFs are subdivided on the basis of their objective. This includes subdividing MIFs based on their balance between financial objectives and social objectives, types of investors involved, terms offered, and the MFIs that are primarily targeted. This can be subdivided into three categories: commercial, commercially oriented, and development funds.75 Commercial Microfinance Investment Funds mainly target private and institutional investors and the funds have a well defined objective, which is distributed through memoranda, prospectuses, and annual reports that allow investors to compare their investments with others.76 These types of funds are generally profit driven. Commercially Oriented Microfinance Investment Funds mainly target private donors, development agencies, private and institutional investors and the funds have a welldefined objective, which is similarly distributed as in the case of commercial microfinance investment funds. This type of fund has a financial objective, but is not necessarily profit driven.77 Microfinance Development Funds mainly target private donors and development agencies and the fund mainly aims to provide capital to MFIs to support their development without necessarily seeking a financial return. Investors do not require documentation such as the other two categories and they mainly seek to maintain their

75 76 77

Ibid. Ibid. Ibid.

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original capital, which is achieved by providing subsidized loans or loans at below market rates.78 5.3. Financial Sources of MIFs According to a 2004 survey conducted by the Consultative Group to Assist the Poor (CGAP) and Appui au développement autonome (ADA) on microfinance investors around the world, close to 79 percent of all capital that goes to financing MFIs is dominated by socially motivated public funding consisting of government sponsored agencies such as the international financial institutions (IFIs). The remaining 21 percent is from other private capital sources mainly consisting of the private and institutional investors.79
Figure 12: Share of MIF financing (2004)
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Private capital IFIs

Table 6: Amount of MIF financing in 2004 (in millions)

Private Capital (debt/equity) $126

IFIs (debt/equity) $484

Bilateral/Multilateral Donors (grants) $500 - 1000

Source: (Matthäus-Maier, Von Pischke et al. 2006)

Source: (Matthäus-Maier, Von Pischke et al. 2006)

Although grants are not included in the above sources of financing for MIFs, it is estimated that bilateral and multilateral donors and private foundations to MIFs contribute approximately $500 million to $1 billion in grants each year.80 Despite IFIs dominating the global capital in microfinance, their investment in SubSaharan Africa is small representing about 6 percent of the global share. Further, the CGAP and ADA survey also found that the amounts that IFIs provide in terms of lending instruments (debt, equity, and guarantees) to Sub-Saharan Africa represents 26 percent while private capital represents 74 percent, which was the largest source of MIF financing.81
Table 7: Amount of MIF financing to Sub-Saharan Africa (in millions)

Private Capital
Debt $30,000,000 48% Equity $15,000,000 24% Guarantees $1,000,000 2% Debt $2,000,000 3%

IFIs
Equity $6,000,000 10% Guarantees $8,000,000 13%

All Investors
Total $62,000,000 100%

Source: (Matthäus-Maier, Von Pischke et al. 2006)

78 79 80 81

Ibid. Ibid. Ibid. Ibid.

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5.4. Portfolio of MIFs Invested in Africa In 2007, there are more than 45 microfinance investment funds that either allocate their investments directly or indirectly to MFIs in Africa. Accordingly, of the 45MIFs, 4 are incorporated in Africa (of which 2 are based there: AfriCap – Mauritius and KEF – South Africa) and the remaining 41 are incorporated outside the continent.82 These funds are well diversified across the various lending instruments, which provide different opportunities for investors.83 These MIFs range in their total assets where a majority (89.8 percent) operates above the conventionally accepted sustainable size of having microfinance portfolios of at least $20 million.84 According to the MIX market, of the 45 MIFs that reported investing in Africa, only 38 MIFs reported their total asset and the share of fund allocation. The total assets of the 38 MIFs were approximately $1.7 billion and they were invested in 1506 microfinance institutions (see Annex j).85
Table 8: Total assets and the size of microfinance portfolios of 38 MIFs invested in Africa (2007)
Number of Active MF Investments
80 36 218 1172 1506

Size of MIF (total asset)
$0 - $5million $5m - $10million

Fund Assets
$21,208,072 $21,468,391

% of Size
1.23% 1.24% 7.83% 89.70% 100%

Number of Active MF Investments in Africa
16 4 42 108 170

% of MIFs
5.31% 2.39% 14.48% 77.82% 100%

$10m - $20million $134,986,262 Greater than $20million $1,546,900,959 TOTAL $1,724,563,684 Source: (MIX 2008)

Further, the sizes of these 38 MIFs are projected to grow to $0.36 billion in 2008, which represents a 21.15 percentage change of the total fund assets. Additionally, the microfinance portfolios of those whose asset size is below $5 million will experience the largest percentage change in their assets of about 94 percent. On the other hand, those MIFs whose total asset size is greater than $20 million will experience the least percentage change of about 19 percent.86
Table 9: Percentage change of total assets of the 38 MIFs invested in Africa (2007) Size of MIF (total asset)
$0 - $5million $5m - $10million $10m - $20million Greater than $20m TOTAL

Fund Assets (2007)
$21,208,072 $21,468,391 $134,986,262 $1,546,900,959 $1,724,563,684

Projected new Funds allocated to MF Investments (1year) $19,927,230 $5,000,000 $44,005,632 $295,800,305 $364,733,167

Projected Fund Assets
$41,135,302 $26,468,391 $178,991,894 $1,842,701,264 $2,089,296,851

% change of Fund Assets
93.96% 23.29% 32.60% 19.12% 21.15%

82 83

MIX (2008). Microfinance Portfolios of Investment Funds, The MIX Market (Microfinance Information eXchange).

Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank. 84 Ibid. 85 MIX (2008). Microfinance Portfolios of Investment Funds, The MIX Market (Microfinance Information eXchange). 86 Ibid.

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In terms of distribution of where the 45 MIFs are invested, 22 percent are commercial funds and their asset size is $0.53 billion. 14 percent are commercially oriented and their asset size is $0.26 billion. 8 percent of the investment has a mix of both commercially orientation and development aspects and their asset size is about $0.05 billion. The largest share, 56 percent are development funds and their asset size are about $0.86 billion.87
Figure 13: Distribution of MIF activities
60.0% 50.0% % of MF Investments 40.0% 30.0% 20.0% 10.0% 0.0%
C om m er ci al O rie nt ed

O rie nt ed

C om m er ci al /C om m er

C om m er ci al ly

D ev el op m

ci al ly

en t

Africa Other Regions

Source: (MIX 2008)

However, of the 45 MIFs, it is estimated that less than 12 percent are invested in MIFs in Africa. According to the data from the Mix Market, of the MIFs investing in Africa; 1.1 percent are commercial funds, 2.2 percent are commercially oriented, 1 percent has a mix of both commercially oriented and development funds, and the largest share of funds are the development funds which represents 7.7 percent of the total assets invested in Africa. Although a large share of the MIFs invested in Africa are development funds, there is a growing distribution of MIFs such as the commercial and commercially oriented that are becoming more attractive to private individuals and institutional investors, which are helping to provide alternative financing for microfinance.88 5.5. Social Responsible Investments The Social Investment Forum defines social responsible investments (SRI) as an “investment process that considers the social and environmental consequences of investments during financial analysis.”89 Accordingly, socially responsible investors rank

87 88

Ibid.

Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank. 89 SIF (2006) Report on Socially Responsible Investing Trends in the United States - 10 Year Review. Volume, 74 pages DOI: January 24, 2006

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SRIs high when they make financial decisions on where to place their investments and this trend has been growing rapidly, especially in the US and Europe.90 A 2007 study by Deutsche Bank found that in the US, more than 10 percent of assets are related to SRI and that in Europe SRI has grown by 27.3 percent since 2003.91 As SRI continues to grow, microfinance is likely to benefit as social investors pursue more investments that are social and environmental friendly. The challenge then is to attract MIFs that either allocates a larger share of their investments in Africa or to incorporate in Africa. Among the 45 MIFs profiled, the largest MIFs are either incorporated in the US or in Europe, where 69 percent are US based, 27 percent are European, are the remaining 4 percent are African based.92
Figure 14: Country of incorporation for MIFs in Africa

4% 27%

USA Europe Africa

69%

Source: (MIX 2008)

6. Analysis of Factors Supporting Location Decision of MIFs
The success and rapid growth of microfinance in many developing countries in terms of the increasing MFI loan volumes and emerging professionalism of the sector, has raised its investment profile. Microfinance has traditionally been funded by donor organizations, but their shrinking financial ability to support MFIs has led to a financial gap that private capital has begun fill (see Figure 12).93 As private capital continues to grow, MIFs will have to play a much greater role in attracting and leveraging private capital to achieve an optimal level for their viability and eventually for their success.94 The following factors have contributed to the success of MIFs:

Dieckmann, R. (2007). Microfinance: An Emerging Investment Opportunity - Uniting Social Investment and Financial Returns. International Topics. D. B. Research. Germany, Deutsche Bank: 20 pages. 91 Ibid. 92 MIX (2008). Microfinance Portfolios of Investment Funds, The MIX Market (Microfinance Information eXchange). 93 Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank. 94 Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank.

90

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Country Risk refers to “a collection of risks associated with investing in a foreign country.”95 In terms of investments, the risks involved with investing in a foreign country include political risk, currency risk, credit risk, operation risk, and liquidity risk, which could impact the growth and performance of MIFs.96 Corporate Governance in the context of investments, it refers to the “overall mode of ruling an organization to ensure that systems and structures are in place to provide conformity with the reasonable expectations of a relevant interest group of shareholders and possibly other stakeholders.” This mainly deals with the supervision of management operation of MFIs and ensuring that implementation of the main mission is adhered to on behalf of the investors.97 Business Environment refers to an “administrative and economic environment that is favorable to businesses and facilitates private sector development.”98 This is an environment that strengthens the state of the business community by ensuring that there is increased transparency on the decisions affecting the private sector. According to the World Bank’s Doing Business index (DBI), decisions affecting the private sector depend on the relative ease of doing business in a country, which covers the following three areas: starting a business, business liabilities, and investor protection.99 Access to Capital Markets is integral for the growth of MIFs. Capital markets allow MIFs to diversify risks in addition to accessing domestic capital. This helps lower both the operational and monitoring costs when trying to convert currencies, which reduces inherent exchange rate risks associated with currency conversions.100 6.1. Case Analysis of MIFs in Africa In an attempt to understand the location decision of the various MIFs that invest in Africa, I will conduct a case analysis of those countries where MIFs are distributed. According to the analysis of the profiled 45 MIFs, a vast majority is either incorporated in the US or Europe and a few are incorporated in Africa (namely South Africa and Mauritius). The following are some of the observations on MIF investments: 6.1.1. Country Risk Analysis According to the Coface Group, who mainly monitor country trends for investment opportunities, Mauritius and South Africa received a country rating of A3 and are both globally ranked 18th and 57th respectively out of 157 countries.101
INVESTOPEDIA. (2008). "Definition of Country Risk." Retrieved 2/29, 2008, from http://www.investopedia.com/terms/c/countryrisk.asp. 96 Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank. 97 Ibid. 98 UNDP. (2007). "Creation of a Favorable Business Environment." Retrieved 2/29, 2008, from http://un.by/en/undp/news/belarus/26-03-07-2.html. 99 DBI (2008). Doing Business Index, World Bank. 100 Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank. 101 Coface (2008). Country Ratings, The Coface Group. 95

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This analysis found that investors preferred to invest in countries that received reasonable ratings from agencies that assessing country risks (see Annex m).
Table 10: Description of Coface country rating Rating A3: A country rating of A3 indicates that changes in the country’s environment are generally good. There may be some volatility in the political and economic environment, which could potentially affect corporate payment behavior. The business environment is secure with occasional difficulties for business in terms of default rates.
Source: (Coface 2008)

In terms of freedom from government, which looks at the size of government in the economy (total government expenditure), Mauritius has a score of 81.4 percent where government spending as a percentage of GDP is 24.9 percent, whereas, South Africa has a score of 76.8 percent and government spending is 27.8 percent of GDP (see Figure 15).102 This analysis found that the more active the government was in the domestic economy in terms of operating state owned enterprises (SOEs) and other government projects that compete directly with the private sector, there was a high likelihood that private investors would stay away since they could not compete.103
Figure 15: Government participation and corruption perceptions

Kenya

South Africa

Mauritius

World

Freedom from Government

Kenya

Freedom from Government

South Africa

Mauritius

Freedom from Government

Source: (2008)

In Figure 15, both Mauritius and South Africa score above the world average in terms of freedom from corruption. According to Transparency International’s (TI) Corruption Perceptions Index for 2007, Mauritius is one of Africa’s least corrupt countries and is ranked 53rd out of 179 countries (ranked 3rd in Africa). In Mauritius, “corruption is not
102 103

(2008). Index of Economic Freedom, Heritage Foundation.

Sidak, G. and D. E. M. Sappington (2002) Competition Law for State-Owned Enterprises. American Enterprise Institute for Public Policy Research (AEI) Volume, DOI: December 3, 2002

Freedom from Government World

Freedom from Corruption

Freedom from Corruption

Freedom from Corruption

Freedom from Corruption

90 80 70 60 50 40 30 20 10 0

84.8 76.8

81.4 68

46

51 40

22

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seen as an obstacle to foreign direct investment.” On the other hand, although South Africa scores higher in the 2007 CPI, corruption is perceived as a significant impediment to foreign direct investment and is globally ranked 43rd (ranked 2nd in Africa).104 This analysis found that while corruption may be prevalent in a country, investors were mainly concerned with the corruption in government functions since this is where they would be most impacted. For example, initiatives that requires foreigners to copartner with local investors, may hinder investors from investing freely or compromise investments due to ‘functional’ corruption of paying bribes to get things done.105 6.1.2. Corporate Governance Analysis According to the Heritage Foundation’s Index of Economic Freedom 2008, foreign and domestic capital in Mauritius is treated equally and there is a well defined foreign investment code that allows investors to freely invest. In Figure 16, Mauritius has a investment freedom score of 70 percent, which is much higher than the world average of 50 percent. In terms of investment freedom in South Africa, investors can freely participate in their economy though policies such as the Black Economic Empowerment program (BEE)106 that aim to increase black ownership in economic activities and other labor laws have created disincentives for some investors. As a result, South Africa received a 50 percent score. As for protecting investors against misuse of corporate assets,107 both Mauritius and South Africa perform much better than the national average in OECD and Sub-Saharan countries.108 In Figure 17, the corporate governance systems for Mauritius and South Africa score high, this has helped to enhance the overall investment climate of these countries, which has allowed for better interaction between the management of MIFs and its shareholders. Further, strong corporate governance has helped “ensure that all the financial stakeholders are able to receive their fair share of the company’s earnings and assets.”109 This analysis found that if the “overall mode of ruling an organization” was mainly driven by the government with little or no private sector participation, the integrity of investments can be compromised and it could potentially create a disincentive for private sector involvement, which could further jeopardize systems and structures that enhance corporate governance and attract investors. In addition, the protection of investors is important and appears to have a positive relation with the levels of investments.

104 105

CPI (2007). Corruption Perceptions Index Transparency International.

Sampson, A. and M. Jarvis. (2007). "Corruption and the bottom line - how to play the game (how to stay in the game)." World Bank Retrieved 4/18, 2008, from http://psdblog.worldbank.org/psdblog/2007/10/corruption-and-.html#more. 106 BEE is not affirmative action, although employment equity forms part of it. The program is driven by the South African legislation under the BEE Act of 2004 and uses a scorecard to measure a company’s empowerment progress in meeting BEE’s objectives of involving more black in economic activities. 107 DBI measure the strength of minority shareholder protections against directors’ misuse of corporate assets for personal gain. The Indicators distinguish 3 dimensions of investor protection: transparency of related-party transactions, liability for self-dealing, and shareholders’ ability to sue officers and directors for misconduct. 108 DBI (2008). Doing Business Index, World Bank. 109 Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank.

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Figure 16: Analysis of investment freedom
80 70 60 50 40 30 20 10 0
Investment Freedom Kenya
Source: (2008)

Figure 17: Protecting investors against misuse of corporate assets
9 8 7 6 5 4 3 2 1 Disclosure Index Director Liability Index Investor Protection Index

Investment Freedom South Africa

Investment Freedom Mauritius

Investment Freedom World

0 OECD SubSaharan Africa Mauritius South Africa Kenya

Source: (DBI 2008)

6.1.3. Business Environment Analysis In terms of overcoming the legal hurdles of starting a business, Mauritius and South Africa, are ranked 27th and 35th globally. When compared to other African countries, they are ranked 1st and 2nd respectively (see Annex n).110
Figure 18: Legal hurdles in incorporating and registering a new business
160

140

120

100 Procedures (number) Duration (days) Cost (% GNI per capita)

80

60

40

20

0 OECD SubMauritius Saharan Africa South Africa Kenya

Source: (DBI 2008)

In Figure 18, the number of procedures for getting a business started for both Mauritius and South Africa are similar to the Organisation for Economic Co-operation and Development (OECD) countries and are well below the Sub-Saharan Africa average. In Mauritius, it takes 6 procedures to get a business started, while in South Africa, it takes

110

DBI (2008). Doing Business Index, World Bank.

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8. The OECD average number of procedures for starting a business is 6 while in SubSaharan Africa it’s 10.8.111 This analysis found that the legal hurdles that business face when starting up and the liabilities they incur are significant when investors are determining their investment decisions. Accordingly, there is a positive relationship between investments flows and the business environment (in terms of procedures required to obtain a business registration, number of days it takes to start, and the cost of starting the business). 6.1.4. Capital Market Analysis South Africa has the largest capital market in Africa and in terms of global financial market sophistication is ranked 25th out of 131 capital markets in the world, which represents a score of 5.19.112 Mauritius’ financial market sophistication is ranked 32nd, which represents a score of 5.05 (see Figure 19). When compared to other African countries, they are ranked 1st and 2nd respectively.
Figure 19: Financial market sophistication
5.3 5.2 5.1 5 4.9 4.8 4.7 4.6 4.5 4.4
Financial Market Sophistication Kenya Financial Market Sophistication Mauritius Financial Market Sophistication South Africa

Source: (GCR 2007)

This analysis found that access to domestic markets plays a significant role in attracting investments since they provide alternative financing opportunities, especially for investors who are trying to mitigate exchange rate risks. Hence, access to domestic markets provides financing opportunities in local currencies and there is a positive relationship between the financial market sophistication and investment flows.113 6.2. Implication of Analysis The implication of the case analysis of MIFs investing in Africa found that; (1) a country’s risk rating, (2) the corporate governance systems that protect investments, (3)
111 112

Ibid.

GCR (2007). The Global Competitiveness Report 2007-2008. Global Competitiveness Report: Country Economic Analysis, World Economic Forum. 113 Litan, R. E., M. Pomerleano, et al. (2003). The future of domestic capital markets in developing countries. Washington, D.C., Brookings Institution Press.

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the administrative and economic environment that businesses operate under, and (4) the ease of accessing domestic capital markets plays an integral role in determining where investors choose to place their investments. The major findings of the case analysis are that a favorable business environment is needed to attract investments. Accordingly, the following are the summaries from the analysis of MIFs in Africa: There is an inverse relationship between the government’s involvement in the economy and levels of investment: The share of government activity in the economy as a share of GDP may crowd-out private investment activity. According to the crowding out theory, government spending that competes with the private sector inherently causes the cost of private investment to increase.114 There is an inverse relationship between ‘functional’115 corruption and the levels of investments: The levels of corruption, which is measured by TI’s Corruption Perception Index are not seen as an obstacle to foreign investments as much as bureaucratic procedures. There is an inverse relationship between government regulation and the levels of investment: Government regulation, which is measured by Heritage Foundation’s Index of Economic Freedom plays a significant role in determining foreign investment. Accordingly, the more a government dictates how businesses should operate, the lower the investment levels. However, a stronger government regulation is preferred when it is specifically targeted to enhance certain processes and procedures, which have had positive outcomes especially where there is strong public-private partnership. For example, Mauritius has adopted liberal investment policies that allow investors to invest freely in their economy, which contributed to high inflows of capital into the country. There is a positive relationship between business environment and the levels of investments: The administrative environment and the inherent cost of operating a business is important for investment, which investors use to base their investment decisions since it would ultimately affect their expected return.116 There is a positive relationship between the sophistication of financial markets and the levels of investments: The role of capital markets are essential for the viability of financial sectors and is instrumental for accessing finances. Hence, the ease of accessing domestic capital markets has a positive relationship with the levels of inflows of capital. As a consequence, the policy implication for a country trying to attract MIF investments is to ensure that they have a favorable business environment, where the government does not crowd out investors and corporate governance systems are in place to mitigate potential investment risks. This would help build the value of investments in the country.

Mankiw, G. (2004) Domestic Effects of Foreign Direct Investment (Keynote Speech by N. Gregory Mankiw, Chairman of the Council of Economic Advisers). American Enterprise Institute for Public Policy Research (AEI) Volume, DOI: December 2, 2004 115 ‘Functional’ corruption looks at government processes or procedures that could inherently impact businesses and the private sector from operating efficiently as a result of hurdles in getting things done and where efficiency is dependent on the ability to bribe government officials. 116 CFA (2008). Corporate Finance and Portfolio Management. Boston, Pearson.

114

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7. Policy Alternatives
7.1. Evaluation Criteria The following evaluation criteria provide stakeholders with essential information for the analysis of the policy alternatives and in selecting the preferred policy. Efficiency: The policy should enable MFIs to effectively absorb and utilize their financial and non-financial resources to economically deliver microfinance services. Financial feasibility: The policy should be cost-effective and affordable for MFIs to adopt and implement in their day-to-day operations. Political feasibility: The policy should be agreeable to all the stakeholders and should generate mutual consensus. Accessibility: The policy should promote the ease of accessing microfinance service, while promoting microfinance delivery. 7.2. Description of Alternatives The following describe the alternatives that can assist with achieving the goal of ensuring a favorable microfinance environment in Kenya, which include: (i) Status Quo, (ii) Government Regulation, and (iii) Self Regulation. To determine whether the proposed alternative fulfills the goal, each alternative is evaluated on how it will accomplish the following objectives: increase capacity, enhance information, increase performance, and enhance self-governance. The following alternative strategies outlined provide opportunities to channel additional sources of funding to microfinance. Policy Alternative 1: Status Quo Alternative 1 consists of guidelines for the provision of microfinance in Kenya and only applies to deposit-taking MFIs. The policy establishes some restrictions on MFIs banks that includes requirement for licensing, governance, deposit protection, and government supervision. Under this policy alternative, non deposit-taking would not be subject to the above terms and conditions and the favorable microfinance environment described would not occur. A status quo policy assumes that the future growth and development of microfinance would comply with existing policy environment. Analysis of Status Quo Pursuing the status quo policy option would limit the growth and development of microfinance in the country and would further exacerbate the financial gap challenging Kenyans in accessing basic socio-economic opportunities that could help improve their livelihoods and socio-economic status. This policy option would also limit investment opportunities for smaller MFIs, which would weaken their ability to expand and deliver microfinance services. Although the status quo policy is both politically and financially feasible, it does not promote the efficient delivery of microfinance services and resources; in addition, access to microfinance services will continue to be a challenge. Hence, selecting to maintain the “status quo” policy is failure to deliver financial resources to expand microfinance and to provide economic opportunities to Kenyans.

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Policy Alternative 2: Government regulation Alternative 2 consists of rules for the provision and delivery of microfinance in Kenya and it applies to all MFIs. The policy establishes restrictions that include requirements for capacity building, accessibility of information, performance criteria, and governance structure. Under this policy alternative, all MFIs would be subject to the above terms and conditions to ensure that the envisioned microfinance environment occurs. A government regulation policy assumes that the future growth and development of microfinance would comply with government requirements on MFIs that would be supervised by the Central Bank. Analysis of Government regulation Pursuing a government regulation policy for all MFIs in Kenya would help address some of the current issues in the microfinance sector; issues in self-regulation, capacity building, non-compliance reporting, and performance standards. This would enhance the sector and raise the quality of MFI services, in addition to helping with the growth and development of microfinance in the country. This policy would help with improving the investment prospects by mitigating some of the inherent risks involved with investing. For example, some of the challenges identified in the microfinance sector such as poor information systems, weak transparency and accountability procedures, and appropriate evaluation procedures to benchmark against acceptable industry norms, can be addressed through the government’s legislative ability to enforce rules (see Annex e). Although the lack of a regulatory framework (except for the deposit-taking MFIs) has been crucial for the growth and development of microfinance in Kenya, a government regulation policy would weaken those MFIs in the developing stage of their operations or may lead to their collapse. While this policy offers a better opportunity for improving efficiency of microfinance provision, politically and financially it may not be feasible, especially for those MFIs that could not afford to comply. In the short term, the cost of conforming to a government regulation may outweigh the benefits for some of the MFIs, but the long term benefits of an improved microfinance sector that efficiently delivers services outweighs the short term impact. For example, if the policy is properly implemented and specifically targets the challenges identified in the problem tree analysis, in the short term, many MFIs would be forced to close their doors (especially rogue outfits), however, as the sector starts to operate effectively more investments may start pouring in, which would help increase the sources of available capital for MFIs to efficiently run their operations, in addition to providing capital to expand their activities. While this policy offers a promising future for microfinance in Kenya, it may not be agreeable to all stakeholders, since it would impact their bottom-line, while for others, it may not be affordable to conform to the policy. Policy Alternative 3: Self-regulation Alternative 3 consists of guidelines for the provision and delivery of microfinance in Kenya and are voluntarily for MFIs. The policy establishes structural arrangements for MFIs that include requirements for capacity building, accessibility of information, performance criteria, and governance structure. Under this policy alternative, MFIs members would be subject to the above terms and conditions to ensure that the

37

envisioned microfinance environment occurs. A self-regulation policy assumes that the future growth and development of microfinance would comply with voluntarily requirements, which is self managed by member MFIs. Analysis of Self-regulation Pursuing a self-regulation policy offers enormous benefits for individual MFIs since decision-making is done by consensus among the MFIs, including setting their own standards. This policy option is voluntarily and gives MFIs a lot of flexibility in determining their administration and level of operation. Self-regulation allows MFIs to improve their efficiency in delivery microfinance services in a cost-benefit manner without constant interference from the government, which would allow MFIs to focus more on their core activities. While self-regulation seems viable for MFIs wanting to grow and development without interference, it has been challenging for smaller MFIs. Self-regulation is vulnerable to elite capture if not applied well and smaller MFIs feel dwarfed and are not actively involved in the decision making process (which has been the key challenge why many MFIs have not joined AMFI). In terms of the evaluation criteria, self-regulation has a lot to offer in the areas of developing microfinance professional and enhancing the performance of MFIs in meeting their objectives – balancing social and financial needs (see Annex e). Compared to a government regulation policy, self-regulation has great potential to guide the development and growth of microfinance in Kenya. However, since the inception of AMFI in 1999, there have been challenges in getting MFIs involved in the process. Additionally, in terms of the environment needed to attract investors, a selfregulation policy may face some resistance in getting MFIs to voluntarily conform to agreed rules. 7.3. Preferred Policy Alternative The preferred policy alternative should consist of rules and framework for the provision and delivery of microfinance in Kenya and it should apply to all MFIs. The preferred policy should establish rules to guide MFIs operation, in addition to providing the framework for microfinance delivery. The rules and framework should include requirements for capacity building, accessibility of information, performance criteria, and governance structure. Based on the evaluation criteria, a combination of policy alternative 2 and 3 – (government regulation and self-Regulation policies) is the best policy option for closing the financial gap facing MFIs in the country and for providing the greatest opportunity for the growth and development of microfinance in Kenya (see Figure 20).

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Figure 20: Benefits of policy alternatives

Source: (see Annex e)

In terms of achieving the goal of ensuring that there is a favorable microfinance environment in Kenya to attract investments, a combination of policy option 2 and 3 has the following to offer: Enhancing information: The growth and development of ICT in Kenya has facilitated the ease of accessing information and services such as microfinance. While it is true that ICT has greatly enabled accessing financial services, it is not always the case. The growing number of people losing their lifesavings to fraudulent operators has been on the rise due to the lack of information on their activities, in addition to those who cannot access ‘formal’ financial services in spite of the availability of advanced technologies. This has also been a challenge even for investor willing to invest in the sector since there is no information of their microfinance activities. A government regulation policy would be most effective in weeding out rogue operators and in ensuring that information is available to guide both consumers and investors in their investment decisions. As seen in Figure 20, targeting policies to enhance the process and procedures of information distribution has a positive relationship with the levels of investments. Performance: The 2007 global recognition that the microfinance sector in Kenya received at the G8 summit is a considerable milestone, which highlights the sector’s effort in delivering financial services in the country. Though this is true for some of the MFIs, a vast majority may not be achieving acceptable industry norms of delivering microfinance services. This has compromised the integrity of the sector, where MFI objectives may not be aligned with what is considered “acceptable microfinance practices”117 yet benefiting under the microfinance environment. A government regulation policy requiring MFIs to report on their activities would increase transparency and accountability in microfinance, while a self-regulation policy would be more effective in ensuring that MFI’s are balancing their objectives according to industry norms (see Annex e). Self-governance: The cost of enforcing a stand-alone government regulation would be extremely high and may strain government resources. Although AMFI
117 “Acceptable microfinance practices” is where MFIs are operating or progressing their activities by optimally balancing their objectives (social, environmental, and financial), without compromising their mission.

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has been unsuccessful in self-regulating the microfinance sector, a government regulation that provides support to AMFI would enhance the checks-and-balances of MFIs. It would also give AMFI some legitimacy, which would encourage more MFI to partake in the process of self-governance of the microfinance sector, would further enhance the performance and transparency of MFIs in the country. Additionally, a government regulation that specifically targets the promotion of self-governance would help reduce the inherent cost associated with enforcement, while at the same time, it would help minimize constraints that discourage microfinance development. For example, the growing numbers of “known” microfinance operators who are taking advantage of consumers are usually wellknown to MFIs and a government regulation that supports self-governance would encourage MFIs to report such activities, which would provide a checks-andbalance on how MFIs operate.

7.4. Implementation Strategy MIFs present opportunities for the continued growth and development of the microfinance sector in Kenya. They allow for alternative sources of funding to be channeled into MFIs, which is essential for closing the financial gap and helping with the expansion and delivery of microfinance services in the country. Because of the great benefit that MIFs offer and their far reaching impact in aiding the economic growth goals of the country, this implementation strategy will deal with issues of self-governance, capacity building, non-compliance reporting requirements, and un-standardized performance criteria in the microfinance sector (see Annex h). The implementation strategy sets out five strategic objectives for addressing the challenges facing MFIs, which include capacity building, accessibility, transparency, performance, and professional management. Each objective describes the effort that will be carried out by MFIs and other stakeholders to ensure its successful implementation. The implementation strategy makes a commitment to the agreed strategic objectives that provides a framework for all stakeholders to engage in through assigned responsibilities as described below. Capacity building: As a first step towards implementing the preferred policy option, all the stakeholders involved in the microfinance sector (those who can affect or be affected) should meet and agree on capacity requirements needed to effectively deliver microfinance activities. AMFI and KEMCAP will be responsible for coordinating the capacity building efforts to strengthen microfinance activities and ensuring they are able to achieve sustainability. This should start immediately the preferred policy option has been adopted. For the first 3 months, capacity-building sessions should be conducted on a weekly basis to ensure that all stakeholders are adequately prepared for the implementation process, in addition to acquiring the necessary skills for efficient and effective provision of microfinance services in the country. After the initial 3 months, capacity building should be done on an ongoing basis with at least 1 capacity building session scheduled annually.

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Accessibility: Ensuring the administrative and economic environment for businesses to operate is integral for the sustainability of the preferred policy option. Easily accessible and affordable sources of funding should be made available through government policies. Accordingly, a consultative group meeting of all stakeholders along with representatives from KIA, CBK and MoF should be convened to work on the ways of reducing the cost of doing business in the country. KIA and AMFI should coordinate this effort and it should start after the capacity building process. This would allow enough time for all stakeholders to understand the challenges facing the sector and the alternative options available for resolving them. Transparency: Developing a transparent framework for the microfinance industry should focus on standardizing the reporting requirements that can help improve the accountability of MFIs. Standardizing the operation procedures and accounting standards of MFIs would promote efficiency of microfinance delivery and it would also help create a more effective microfinance environment over the long-term that provides quality microfinance services. This should be coordinated by AMFI. Performance criteria: Similar to transparency, performance guidelines should be put in place and it should be similar across the board for all MFIs. Standardizing the performance criteria for MFIs will contribute to raising the quality and efficiency of microfinance delivery in the country. Additionally, having a standardized performance criterion would provide confidence in the microfinance sector, especially in terms of attracting greater investment opportunities. Immediately following the capacity building process, AMFI should help setup and coordinate a working group of selected members from the stakeholder list to work on a performance guideline for institutions delivering microfinance and to submit it before the stakeholders within 6 months of the working group’s inception. The working group’s recommendations with the mutual agreement from the stakeholders should be immediately adopted and implemented within a 1-year time frame. Professional management: AMFI and KEMCAP should create programs for capacity building with an emphasis on developing experts that would help with ensuring that microfinance resources are efficiently used in meeting their intended goal. All stakeholders should work on developing management guidelines that will promote professionalism and strengthen MFIs’ ability to compete in the ever-changing microfinance environment. This should be coordinate by AMFI along with selected representatives from the represented MFIs. Developing a professional management process should be integrated with the capacity building process, in addition to incorporating it with the ongoing discussions of the working group looking at the performance guidelines for the microfinance sector.

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7.5. Monitoring and Evaluation All the stakeholders should agree on a performance-based evaluation criterion. Benchmarking with industry best practices such as the DBI and Rating Fund118 should be developed to follow up with the implementation strategy. The monitoring and evaluation should entail regular follow ups and consistently publishing microfinance information to ensure challenges with the preferred policy option are being addressed appropriately and modified where possible. This would help ensure higher efficiency as the policy is implemented.

8. Policy Implication
While the preferred policy option offers MFIs with efficient and effective opportunities for delivering microfinance services in the country, it also offers GoK an opportunity in freeing up resources that could go towards other development projects that are important for the socio-economic goals of the country. On the issue of key benefits that the preferred policy option has to offer to both the MFIs in the country and to MIFs is shown in Table 10 (see Annex f).
Table 11: Description of the benefits for the preferred policy option

Benefits to MFIs
Well regulated environment Enhanced administrative efficiency of MFIs in delivering microfinance Access to a variety of investors/capital sources Reduced operation costs of providing microfinance services Ease of expanding service delivery due to better profit margins Improved professional management and performance of MFIs and microfinance resources Increased transparency and accountability MFIs Access to technical assistance for industry experts

Benefits to MIFs
Increased investment fund portfolio size in both assets and profits Increased flexibility to respond to capital needs of MFIs Access to adequate sources of capital Enhanced social performance through increasing outreach activities in the country that reach a larger number of microfinance clients and reaching the segment of the population not served by financial services Reduced operational risks in their lending activities through increased transparency and accountability of MFIs Increased MFIs as potential investment opportunities, while reducing their risks Effective governance of investment funds as a consequence of a stable and business friendly environment

While all three policy alternatives (status quo, government regulation, and selfregulation) offer both MFIs and MIFs benefits, only the preferred option provides enormous benefits to not only the MFIs and MIFs, but also to the government (see Annex h).

118

The Rating Fund aims to encourage greater demand from MFIs services, strengthen the quality of supply, as well as improve transparency of MFI’s financial performance (http://www.ratingfund.org/)

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9. Conclusion
To ensure that the preferred policy option sustains itself continued efforts by AMFI in organizing public awareness events, conferences, and forums to reinforce the benefits of implementing and adopting the policy should be done on an ongoing basis to ensure that its efforts are not compromised and that all stakeholders are engaged with the process and are fully committed. The following are recommendations to ensure that the goal of having a favorable microfinance environment in Kenya to attract investments: Combining the government regulation and self-regulation policies CBK should provide support to AMFI in reviewing regulations that can improve a sound microfinance environment, while at the same time, minimizing or removing regulatory constraints that discourage microfinance development Enhancing information distribution processes that facilitate access to information on microfinance activities to reduce risks and improve MFI performance Encouraging transformation of MFIs to Banks Integrate continual learning processes for staff development and regularly reviewing organization development goals Promoting professionalism in MFIs through management programs to improve financial performance and MFI capacity Developing benchmarks for peer group evaluations Strengthening efforts to ensure that the private sector is actively engaged and overall development of partnerships with stakeholders involved in the microfinance sector Finally, the preferred policy option of combining government regulation and selfregulation will not only help close the financial gap that has greatly undermined the capabilities of MFIs in Kenya, but it will also attract MIF investment that will promote the development and expansion of microfinance activities in the country.

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FSD (2007). Financial Access in Kenya: Results of the 2006 National Survey. FinaAccess Study. finaccess. Nairobi, Financial Sector Deepening (FSD) Kenya: 44 pages. GCR (2007). The Global Competitiveness Report 2007-2008. Global Competitiveness Report: Country Economic Analysis, World Economic Forum. gdrc. (2007). "MFI Capacity Building." Microfinance Networks and Resource Centers Retrieved 3/5, 2008, from http://www.gdrc.org/icm/framework/frame-3.html. GoK (2002). The Capital Markets Act (CAP 485A). CMA. Nairobi, Ministry of Finance: 6 pages. GoK (2004). Investment Promotion Act 2004. M. o. Finance. Nairobi, Government Printers: 19 pages. Hughes, N. and S. Lonie (2007). "M-PESA: Mobile Money for the “Unbanked” Turning Cellphones into 24-Hour Tellers in Kenya in Kenya." Innovations 2(1-2): 14 pages. INVESTOPEDIA. (2008). "Definition of Country Risk." Retrieved 2/29, 2008, from http://www.investopedia.com/terms/c/countryrisk.asp. Johnson, S. (2004). "The Impact of Microfinance in Local Financial Markets: A Case Study from Kenya." Journal of International Development 16(3): 34 pages. Johnson, S., M. Malkamaki, et al. (2006). "Tackling the 'Frontiers' of Microfinance in Kenya: The Role for Decentralized Services." Small Enterprise Development 17(3): 13 pages. Litan, R. E., M. Pomerleano, et al. (2003). The future of domestic capital markets in developing countries. Washington, D.C., Brookings Institution Press. Mankiw, G. (2004) Domestic Effects of Foreign Direct Investment (Keynote Speech by N. Gregory Mankiw, Chairman of the Council of Economic Advisers). American Enterprise Institute for Public Policy Research (AEI) Volume, DOI: December 2, 2004 Matthäus-Maier, I., J. D. Von Pischke, et al. (2006). Microfinance investment funds : leveraging private capital for economic growth and poverty reduction. Berlin ; New York; Frankfurt, Germany, Springer ; KfW Entwicklungsbank. Microcredit (2008) Beggars, Savers and Borrowers: The 'Good Families' of Jamii Bora. Microcredit Summit E-News Volume, DOI: March 2008 Microskills. (2008). "Microfinance: Training and Capacity Building." Retrieved 3/5, 2008, from http://www.microskills.co.ke/trainings.html.

45

Miller, R. L. (2006). Economics Today. Boston, Pearson Addison-Wesley. Mishkin, F. S. (2006). The economics of money, banking, and financial markets. Boston, Addison Wesley. MIX (2008). Microfinance Portfolios of Investment Funds, The MIX Market (Microfinance Information eXchange). Mutua, A. (2007). Pyramid Schemes. O. o. G. Spokesperson. Nairobi, Office of Public Communications: 1 page. Ndung'u, N. (2007). Kenya Microfinance. The Kenyan Microfinance Conference, Strathmore University, Nairobi, CBK. Ngung'u, N. (2007). Proposed Microfinance Prudential Regulations. Workshop to Review the Proposed Microfinance Prudential Regulations, Kenya School of Monetary Studies, Nairobi, Central Bank of Kenya. NSE. (2007). "NSE Listed Companies and Market Capitalization." Listed Companies Retrieved 11/2, 2007, from http://nse.co.ke/newsite/inner.asp?cat=companies. NSE. (2007). "NSE Monthly Statistical Bulletin." Market Statistics Retrieved 11/2, 2007, from http://nse.co.ke/newsite/inner.asp?cat=sbullet. Odhiambo, W. (2004). Pulling Apart: Facts and Figures on Inequality in Kenya. Nairobi, Society for International Development (SID): 85 pages. Ombara, O. (2007). Equity Bank CEO to Address G8 Meeting. The Standard. Nairobi, The Standard Group. Omino, G. (2005). Regulation and Supervision of Microfinance Institutions in Kenya. C. B. o. Kenya, IRIS Center. Pickens, M. (2007) Moving Beyond Bank Walls: Notes on Regulation of Branchless Banking in Kenya. CGAP - Technology Program Volume, 19 pages DOI: November 2007 Pollin, R., M. w. Githinji, et al. (2007). An Employment-Targeted Economic Program for Kenya. Brazilia, UNDP. Sambu, Z. (2007). Eight saccos deregistered in pyramid schemes crackdown Business Daily. Nairobi.

46

Sampson, A. and M. Jarvis. (2007). "Corruption and the bottom line - how to play the game (how to stay in the game)." World Bank Retrieved 4/18, 2008, from http://psdblog.worldbank.org/psdblog/2007/10/corruption-and-.html#more. SantaMaria, A. (2007). "Microfinance Regulations in Kenya." MicroFinance Sector Retrieved 1/28, 2008, from http://www.parismfn.org/parismfn/2007/in_kenya_there_.html. SID (2004). Pulling Apart: Facts and Figures on Inequality in Kenya: 85 pages. Sidak, G. and D. E. M. Sappington (2002) Competition Law for State-Owned Enterprises. American Enterprise Institute for Public Policy Research (AEI) Volume, DOI: December 3, 2002 SIF (2006) Report on Socially Responsible Investing Trends in the United States - 10 Year Review. Volume, 74 pages DOI: January 24, 2006 UNDP. (2007). "Creation of a Favorable Business Environment." Retrieved 2/29, 2008, from http://un.by/en/undp/news/belarus/26-03-07-2.html. USA.gov (2007). 2007 Investment Climate Statement - Kenya. D. o. State. Washington. USAID/Kenya. (2003). "The Association of Microfinance Institutions." Agriculture and Microenterprise Development Retrieved 2/2, 2008, from http://www.usaidkenya.org/ke.agbuen/activities/microfinance.html. Vodafone. (2007). "Safaricom and Vodafone Launch M-PESA, A New Mobile Payment Service." Retrieved 10/24, 2007, from http://www.sendmoneyhome.org/uploads/2007/02/vodafone-m-pesa-launch-final.pdf. WB. (2001). "What is Sustainable Development." Retrieved 3/27, 2008, from http://www.worldbank.org/depweb/english/sd.html. WB. (2008). "Stakeholder Analysis." Public Sector Governance Retrieved 3/13, 2008, from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPUBLICSECTORANDG OVERNANCE/EXTANTICORRUPTION/0,,contentMDK:20638051~pagePK:210058~ piPK:210062~theSitePK:384455,00.html. WDI (2007). Kenya's Population Size and Population Distribution, World Bank.

47

Annex a: Problem Tree Analysis

48

Annex b: Stakeholder Matrix
Group
Primary Stakeholders
AMFI Tier 1 MFIs Tier 2 MFIs Tier 3 MFIs Traditional Banks NBFIs Private sector Business community Interest groups Excluded groups
Need additional sources of capital Needs investors Capacity building of MFIs Reducing inefficiencies of delivery of microfinance Need additional sources of capital to expand services Can lobby MFIs and GoK Has support of international agencies Has resources or ability to raise resources from mobilizing savings Can lobby GoK and international agencies Has resources or ability to raise resources from international agencies Can lobby GoK and international agencies Has linkages with international organizations Little or no financial resources Can lobby international agencies Has linkages with international organizations Has resources Can lobby GoK and private sector Has resources or ability to raise resources from mobilizing savings Can lobby GoK and interest groups Has resources Can lobby business community Can pressure GoK and political groups Can lobby private sector and interest groups Has resources Can pressure GoK and political groups Has no resources Can lobby political groups Regulatory and oversight body Can influence policy framework Can lobby GoK and international agencies Can influence policy framework Has resources (financial and technical assistance) Can pressure GoK and political groups Can lobby international agencies Can pressure GoK and political groups Can lobby international agencies and excluded groups

Salience (Importance/Interest in issue)

Power (Resources/Influence)

Position on the issue (-3 to +3)
+3 +2 +2 +3 -3 -1 +3 +3 +3 +3 +2 +1 +2 +3

Need additional sources of capital Needs investors and guarantees Need technical assistances Need additional source of capital to expand their portfolio Need additional sources of long term capital Need accurate and timely information for financial decision on investments Need investors Need access to affordable capital Want to enhance their socio-economic wellbeing Want to access a wide range of financial services Need access to financial resources

Secondary Stakeholders
Public sector agencies Political groups NGOs Civil society External Stakeholders International agencies Other public sector agencies
Develop financial market conditions Can improve business environment Want to enlarge the political base Social motivation – want access to economic opportunities

Interested in the growth and development of financial sector Want increased access to investment opportunities Want access to affordable financial services Social interest and the reduction of poverty Interested in the growth and development of the financial sector Provision of basic infrastructure Ensuring the efficient use of resources

Has resources (financial and technical assistance) Can pressure GoK Can influence policy framework

+3 0

49

Annex c: List of 33 AMFI members
AMFI MEMBERS
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 33 AAR Credit Services ADOK TIMO Agakhan Foundation AIG Insurance BIMAS CIC Insurance Co-operative Bank ECLOF Elite Microfinance Equity Bank Faulu Kenya Fusion Capital Ltd Jamii Bora Jitegemea Credit Scheme Jitegemee Trust K-rep Bank Ltd K-rep Development Agency KADET Kenya Gatsby Trust Kenya Post Office Savings Bank Kenya Women Finance Trust Micro Kenya Ltd Millenia Multipurpose credit Society OIKO CREDIT Plan Internationa - Central/Nyaza SISDO SMEP SNV SUNLINK Swiss Contact WEDCO WEEC Yehu Enterprises Support Services Nairobi Kisumu Nairobi Nairobi Embu Nairobi Nairobi Nairobi Mombasa Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nakuru Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Nairobi Kisumu Kiserian Kwale

50

Annex d: Kenya’s Demographic Data (1990 – 2006)
Series Name
Population ages 0-14 (% of total) Population ages 15-64 (% of total) Population ages 65 and above (% of total) Population, female (% of total) Population, male (% of total) Rural population (% of total population) Urban population (% of total)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

48.9

48.4

47.9

47.4

46.8

46.3

45.8

45.3

44.9

44.4

44.1

43.7

43.4

43.1

42.9

42.8

42.8

48.4

48.9

49.4

50.0

50.5

51.0

51.5

51.9

52.4

52.7

53.1

53.4

53.8

54.0

54.2

54.4

54.4

2.7

2.7

2.7

2.7

2.7

2.7

2.7

2.8

2.8

2.8

2.8

2.8

2.9

2.8

2.8

2.8

2.8

50.2

50.2

50.2

50.2

50.2

50.2

50.2

50.2

50.2

50.2

50.2

50.1

50.1

50.0

50.0

49.9

49.9

49.8

49.8

49.8

49.8

49.8

49.8

49.8

49.8

49.8

49.8

49.8

49.9

49.9

50.0

50.0

50.1

50.1

81.8

81.6

81.5

81.3

81.2

81

80.9

80.7

80.6

80.4

80.3

80.1

79.9

79.7

79.5

79.3

79

18.2

18.4

18.5

18.7

18.8

19

19.1

19.3

19.4

19.6

19.7

19.9

20.1

20.3

20.5

20.7

21

Source: (WDI 2007)

51

Annex e: Evaluation of alternatives

52

Annex f: Impact of Policy Alternatives
Status Quo
Limited access to sources of capital. Larger MFIs can attract investments easily, while smaller MFIs struggle to attract investors and are unsustainable Weak governance structures overseeing microfinance activities Unequal distribution of microfinance resources High transaction costs of delivering microfinance services Low institutional capacity Lack of transparency and accountability of MFI operations Lack of performance standards

Regulation
Improved governance structures overseeing microfinance activities Better distribution of microfinance resource Improved access to sources of capital Enhanced transparency and accountability of MFI operations High transaction costs of delivering microfinance service due to increased cost of compliance Reduce ability of smaller MFIs to compete leading to a some of MFIs stopping their service delivery Reduced supply of microfinance services

Self-regulation
Better self-regulated environment Better administrative efficiency of MFIs in delivering microfinance Improved distribution of microfinance resources Improved access to sources of capital Better transparency and accountability of MFI operations Reduced operation costs of providing microfinance services Improved professional management and performance of MFIs and microfinance resources

Combination (Government and Self-regulation)
Well self-regulated environment due to the higher incentives and benefits of having more access to investors/investment opportunities Enhanced administrative efficiency of MFIs in delivering microfinance Better equitable distribution of microfinance resources Greater access to a variety of sources of capital/investors Better transparency and accountability of MFI operations Reduced operation costs of providing microfinance services Improved professional management and performance of MFIs and microfinance resources

53

Annex g: Analysis of Policy Alternatives on MFIs and MIFs

54

Annex h: Policy outcome of preferred policy option

55

Annex i: List of 45 MIFs invested in Africa

Fund Name
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 33 34 35 36 37 38 39 40 41 42 43 44 45 Luxmint - ADA DBMDF FIG Kolibri Kapital ASA CRESUD Goodwell Dignity Fund, L.P. ICCO Unitus INCOFIN Rabobank SIDI I&P Developpement Advans SA ACCION Investments AfriCap OTI St. Honore Microfinance Fund ALTERFIN Consorzio Etimos Impulse (Incofin) MicroVest I Oxfam Novib Fund ShoreCap Intl. TFSF Rural Impulse Fund HTF KEF CMI Dual Return Fund Triodos-Doen Foundation Citigroup Foundation CORDAID Gray Ghost Calvert Foundation Dexia Microcredit Fund responsAbility Fund Oikocredit BIO DEG Fundació Un Sol Món KFW UNCDF USAID Credit Guarantees VDK MFI Loan Portfolio TOTAL

Country of Incorporation
Luxembourg United States Switzerland Norway Italy Netherlands, The United States Netherlands, The United States Belgium Netherlands, The France France Luxembourg Cayman Islands Mauritius United States Luxembourg Belgium Italy Belgium United States Netherlands, The United States Netherlands, The Belgium Netherlands, The South Africa Netherlands, The Luxembourg Netherlands, The United States Netherlands, The United States United States Luxembourg Luxembourg Netherlands, The Belgium Germany Spain Germany United States United States Belgium

Fund Assets (US$)
$2,107,728 $3,259,923 $3,481,771 $3,900,000 $3,958,650 $4,500,000 $5,495,000 $6,496,272 $9,477,119 $10,556,400 $12,180,900 $12,652,433 $12,665,300 $12,938,814 $12,969,985 $13,300,000 $13,500,000 $15,874,783 $18,347,647 $21,380,343 $23,751,900 $24,230,000 $28,125,000 $28,333,000 $31,884,269 $38,000,000 $39,968,387 $48,550,000 $50,000,000 $50,586,594 $56,593,726 $63,000,000 $63,473,991 $75,000,000 $106,258,735 $161,837,903 $180,141,111 $455,786,000 $1,724,563,684

% of Fund Assets allocated to MF Investments
100.0% 86.8% 72.1% 25.3% 66.7% 100.0% 91.0% 72.9% n/a 96.3% 78.2% 38.1% n/a 100.0% 96.5% 24.1% n/a 53.5% 38.2% 66.5% 97.2% 93.2% 100.0% 37.6% 70.2% 0.0% 93.0% n/a 100.0% 83.7% 79.9% n/a 54.6% 100.0% 25.6% 66.7% 88.2% 43.5% n/a n/a n/a n/a n/a n/a n/a

Number of Active MF Investments
18 28 17 5 12 0 8 20 8 19 89 37 8 2 5 3 13 6 36 107 22 25 77 9 18 0 37 7 55 74 42 90 16 50 105 132 306 16 9 16 99 12 25 1683

Projected new Funds allocated to MF Investments
$947,905 $1,000,000 $4,000,000 $1,979,325 $12,000,000 $5,000,000 $5,278,200 $8,865,710 $4,861,722 $5,000,000 $5,000,000 $15,000,000 $3,298,875 $7,500,000 $2,500,000 $7,917,300 $38,000,000 $3,958,650 $20,480,000 $15,000,000 $15,000,000 $6,597,750 $2,400,000 $9,473,730 $12,000,000 $20,000,000 $131,674,000 $642,235 $4,500,000 $32,988,750 $402,864,152

MIF Categories
DF DF DF DF DF CO C CO/DF CO/DF DF CO/DF DF CO CO CO CO DF C DF DF C C CO CO/DF CO CO DF DF CO C DF DF CO C DF C C DF CO/DF CO CO DF DF DF CO

*The highlighted microfinance investment funds are incorporated in Africa

56

Annex j: List of 38 MIFs that reported their total asset and share of fund allocation
Fund Name % of Fund Assets allocated to MF Investments 100.0% 86.8% 72.1% 25.3% 66.7% 100.0% 91.0% 72.9% n/a 96.3% 78.2% 38.1% n/a 100.0% 96.5% 24.1% n/a 53.5% 38.2% 66.5% 97.2% 93.2% 100.0% 37.6% 70.2% 0.0% 93.0% n/a 100.0% 83.7% 79.9% n/a 54.6% 100.0% 25.6% 66.7% 88.2% 43.5% Projected new Funds allocated to MF Investments $947,905 $1,000,000 $4,000,000 $1,979,325 $12,000,000 $5,000,000 $5,278,200 $8,865,710 $4,861,722 $5,000,000 $5,000,000 $15,000,000 $3,298,875 $7,500,000 $2,500,000 $7,917,300 $38,000,000 $3,958,650 $20,480,000 $15,000,000 $15,000,000 $6,597,750 $2,400,000 $9,473,730 $12,000,000 $20,000,000 $131,674,000 $364,733,167

Country of Incorporation 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 33 34 35 36 37 38 Luxmint - ADA DBMDF FIG Kolibri Kapital ASA CRESUD Goodwell Dignity Fund, L.P. ICCO Unitus INCOFIN Rabobank SIDI I&P Developpement Advans SA ACCION Investments AfriCap OTI St. Honore Microfinance Fund ALTERFIN Consorzio Etimos Impulse (Incofin) MicroVest I Oxfam Novib Fund ShoreCap Intl. TFSF Rural Impulse Fund HTF KEF CMI Dual Return Fund Triodos-Doen Foundation Citigroup Foundation CORDAID Gray Ghost Calvert Foundation Dexia Microcredit Fund responsAbility Fund Oikocredit TOTAL Luxembourg United States Switzerland Norway Italy Netherlands, The United States Netherlands, The United States Belgium Netherlands, The France France Luxembourg Cayman Islands Mauritius United States Luxembourg Belgium Italy Belgium United States Netherlands, The United States Netherlands, The Belgium Netherlands, The South Africa Netherlands, The Luxembourg Netherlands, The United States Netherlands, The United States United States Luxembourg Luxembourg Netherlands, The

Fund Assets (US$) $2,107,728 $3,259,923 $3,481,771 $3,900,000 $3,958,650 $4,500,000 $5,495,000 $6,496,272 $9,477,119 $10,556,400 $12,180,900 $12,652,433 $12,665,300 $12,938,814 $12,969,985 $13,300,000 $13,500,000 $15,874,783 $18,347,647 $21,380,343 $23,751,900 $24,230,000 $28,125,000 $28,333,000 $31,884,269 $38,000,000 $39,968,387 $48,550,000 $50,000,000 $50,586,594 $56,593,726 $63,000,000 $63,473,991 $75,000,000 $106,258,735 $161,837,903 $180,141,111 $455,786,000 $1,724,563,684

% of Size 0.12% 0.19% 0.20% 0.23% 0.23% 0.26% 0.32% 0.38% 0.55% 0.61% 0.71% 0.73% 0.73% 0.75% 0.75% 0.77% 0.78% 0.92% 1.06% 1.24% 1.38% 1.40% 1.63% 1.64% 1.85% 2.20% 2.32% 2.82% 2.90% 2.93% 3.28% 3.65% 3.68% 4.35% 6.16% 9.38% 10.45% 26.43% 100%

Number of Active MF Investments 18 28 17 5 12 0 8 20 8 19 89 37 8 2 5 3 13 6 36 107 22 25 77 9 18 0 37 7 55 74 42 90 16 50 105 132 306 1506

% of MIFs 1.20% 1.86% 1.13% 0.33% 0.80% 0.00% 0.53% 1.33% 0.53% 1.26% 5.91% 2.46% 0.53% 0.13% 0.33% 0.20% 0.86% 0.40% 2.39% 7.10% 1.46% 1.66% 5.11% 0.60% 1.20% 0.00% 2.46% 0.46% 3.65% 4.91% 2.79% 5.98% 1.06% 3.32% 6.97% 8.76% 20.32% 100%

57

Annex k: Categories of MIFs invested in Africa
Fund Name 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 33 34 35 36 37 38 39 40 41 42 43 44 45 Luxmint - ADA DBMDF FIG Kolibri Kapital ASA CRESUD Goodwell Dignity Fund, L.P. ICCO Unitus INCOFIN Rabobank SIDI I&P Developpement Advans SA ACCION Investments AfriCap OTI St. Honore Microfinance Fund ALTERFIN Consorzio Etimos Impulse (Incofin) MicroVest I Oxfam Novib Fund ShoreCap Intl. TFSF Rural Impulse Fund HTF KEF CMI Dual Return Fund Triodos-Doen Foundation Citigroup Foundation CORDAID Gray Ghost Calvert Foundation Dexia Microcredit Fund responsAbility Fund Oikocredit BIO DEG Fundació Un Sol Món KFW UNCDF USAID Credit Guarantees VDK MFI Loan Portfolio TOTAL Country of Incorporation Luxembourg United States Switzerland Norway Italy Netherlands, The United States Netherlands, The United States Belgium Netherlands, The France France Luxembourg Cayman Islands Mauritius United States Luxembourg Belgium Italy Belgium United States Netherlands, The United States Netherlands, The Belgium Netherlands, The South Africa Netherlands, The Luxembourg Netherlands, The United States Netherlands, The United States United States Luxembourg Luxembourg Netherlands, The Belgium Germany Spain Germany United States United States Belgium Fund Assets (US$) $2,107,728 $3,259,923 $3,481,771 $3,900,000 $3,958,650 $4,500,000 $5,495,000 $6,496,272 $9,477,119 $10,556,400 $12,180,900 $12,652,433 $12,665,300 $12,938,814 $12,969,985 $13,300,000 $13,500,000 $15,874,783 $18,347,647 $21,380,343 $23,751,900 $24,230,000 $28,125,000 $28,333,000 $31,884,269 $38,000,000 $39,968,387 $48,550,000 $50,000,000 $50,586,594 $56,593,726 $63,000,000 $63,473,991 $75,000,000 $106,258,735 $161,837,903 $180,141,111 $455,786,000 $1,724,563,684 % of Fund Assets allocated to MF Investments 100.0% 86.8% 72.1% 25.3% 66.7% 100.0% 91.0% 72.9% n/a 96.3% 78.2% 38.1% n/a 100.0% 96.5% 24.1% n/a 53.5% 38.2% 66.5% 97.2% 93.2% 100.0% 37.6% 70.2% 0.0% 93.0% n/a 100.0% 83.7% 79.9% n/a 54.6% 100.0% 25.6% 66.7% 88.2% 43.5% n/a n/a n/a n/a n/a n/a n/a Number of Active MF Investments 18 28 17 5 12 0 8 20 8 19 89 37 8 2 5 3 13 6 36 107 22 25 77 9 18 0 37 7 55 74 42 90 16 50 105 132 306 16 9 16 99 12 25 1683 Projected new Funds allocated to MF Investments $947,905 $1,000,000 $4,000,000 $1,979,325 $12,000,000 $5,000,000 $5,278,200 $8,865,710 $4,861,722 $5,000,000 $5,000,000 $15,000,000 $3,298,875 $7,500,000 $2,500,000 $7,917,300 $38,000,000 $3,958,650 $20,480,000 $15,000,000 $15,000,000 $6,597,750 $2,400,000 $9,473,730 $12,000,000 $20,000,000 $131,674,000 $642,235 $4,500,000 $32,988,750 $402,864,152 MIF Categories DF DF DF DF DF CO C CO/DF CO/DF DF CO/DF DF CO CO CO CO DF C DF DF C C CO CO/DF CO CO DF DF CO C DF DF CO C DF C C DF CO/DF CO CO DF DF DF CO 200 3 9 10 8 39 10 5 12 4 6 2 5 10 2 2 1 8 3 11 2 3 1 6 10 7 4 1 3 Number of Active MF Investments in Africa 4 5 4

*Highlighted Acronyms C – Commercial microfinance investment funds CO – Commercially oriented microfinance investment funds DF – Microfinance development funds

58

Annex l: MIFs lending instruments
% of Fund Assets allocated to MF Investments 100.0% 86.8% 72.1% 25.3% 66.7% 100.0% 91.0% 72.9% n/a 96.3% 78.2% 38.1% n/a 100.0% 96.5% 24.1% n/a 53.5% 38.2% 66.5% 97.2% 93.2% 100.0% 37.6% 70.2% 0.0% 93.0% n/a 100.0% 83.7% 79.9% n/a 54.6% 100.0% 25.6% 66.7% 88.2% 43.5% n/a n/a n/a n/a n/a n/a n/a Number of Active MF Investments 18 28 17 5 12 0 8 20 8 19 89 37 8 2 5 11 13 6 36 107 22 25 77 9 18 0 37 7 55 74 42 90 16 50 105 132 306 16 9 16 99 12 25 1691 200 3 9 10 8 39 10 5 12 4 6 2 5 10 2 2 1 8 3 11 2 3 1 6 10 7 4 1 3 Number of Active MF Investments in Africa 4 5 4 MIF Categories DF DF DF DF DF CO C CO/DF CO/DF DF CO/DF DF CO CO CO CO DF C DF DF C C CO CO/DF CO CO DF DF CO C DF DF CO C DF C C DF CO/DF CO CO DF DF DF CO Loans, Grants, Gaurantees, TA Loans, Equity, Grants, Gaurantees, TA Loans, Grants, TA Gaurantees Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Loans, Gaurantees Loans, Equity Loans, Equity, Gaurantees, TA Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Loans, Equity, Gaurantees Grants, Gaurantees, TA Loans, Equity, Grants, Gaurantees, TA Bank, NBFI, Cooperative/Credit Union, NGOs NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Equity Bank, NBFI, Cooperative/Credit Union, NGOs Loans, Equity, Gaurantees Bank, NBFI, Cooperative/Credit Union, NGOs Loans, Gaurantees, TA Loans, Equity, TA Loans, Equity Bank, NBFI, Cooperative/Credit Union, NGOs Bank, Rural Bank, NBFI Bank, NBFI, Cooperative/Credit Union Loans, Equity, Gaurantees, TA Loans, TA Loans, Equity, Gaurantees Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Equity, Gaurantees, TA Loans, Equity Bank, NBFI, NGOs Loans, Equity, Grants, Gaurantees, TA Loans, Equity, Grants, Gaurantees, TA Loans, Equity, Gaurantees Loans, Grants, Gaurantees, TA Loans, Equity, Gaurantees, TA Loans, Equity Loans, Equity, Gaurantees, TA Rural Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Loans NBFI, Cooperative/Credit Union, NGOs Loans Gaurantees, TA

Fund Name 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 33 34 35 36 37 38 39 40 41 42 43 44 45 Luxmint - ADA DBMDF FIG Kolibri Kapital ASA CRESUD Goodwell Dignity Fund, L.P. ICCO Unitus INCOFIN Rabobank SIDI I&P Developpement Advans SA ACCION Investments AfriCap OTI St. Honore Microfinance Fund ALTERFIN Consorzio Etimos Impulse (Incofin) MicroVest I Oxfam Novib Fund ShoreCap Intl. TFSF Rural Impulse Fund HTF KEF CMI Dual Return Fund Triodos-Doen Foundation Citigroup Foundation CORDAID Gray Ghost Calvert Foundation Dexia Microcredit Fund responsAbility Fund Oikocredit BIO DEG Fundació Un Sol Món KFW UNCDF USAID Credit Guarantees VDK MFI Loan Portfolio TOTAL

Fund Assets (US$) $2,107,728 $3,259,923 $3,481,771 $3,900,000 $3,958,650 $4,500,000 $5,495,000 $6,496,272 $9,477,119 $10,556,400 $12,180,900 $12,652,433 $12,665,300 $12,938,814 $12,969,985 $13,300,000 $13,500,000 $15,874,783 $18,347,647 $21,380,343 $23,751,900 $24,230,000 $28,125,000 $28,333,000 $31,884,269 $38,000,000 $39,968,387 $48,550,000 $50,000,000 $50,586,594 $56,593,726 $63,000,000 $63,473,991 $75,000,000 $106,258,735 $161,837,903 $180,141,111 $455,786,000 $1,724,563,684

Lending Instruments Loans, Equity, Gaurantees, TA

Eligible Partners Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs Bank, NBFI, Cooperative/Credit Union, NGOs

59

Annex m: Coface Country Risk Rating
Rating: A1 The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very low on average. Rating: A2 The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average. Rating: A3 Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average. Rating: A4 A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average. Rating: B Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable. Rating: C A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high. Rating: D A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.

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Annex n: Doing Business Index
Economy Singapore New Zealand United States Hong Kong, China Denmark United Kingdom Canada Ireland Australia Iceland Norway Japan Finland Sweden Thailand Switzerland Estonia Georgia Belgium Germany Netherlands Latvia Saudi Arabia Malaysia Austria Lithuania Mauritius Puerto Rico Israel Korea France Slovakia Chile St. Lucia South Africa Fiji Portugal Spain Armenia Kuwait Antigua and Barbuda Luxembourg Namibia Mexico Hungary Bulgaria Tonga Romania Oman Taiwan, China Botswana Mongolia Italy St. Vincent and the Grenadines Slovenia Czech Republic Turkey Peru Belize Maldives Samoa Vanuatu Jamaica Ease of Doing Business Rank 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 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 63 Starting a Business 9 3 4 13 18 6 2 5 1 14 28 44 16 22 36 35 20 10 19 71 41 30 36 74 83 57 8 7 17 110 12 72 39 45 53 69 38 118 47 121 27 41 101 75 67 100 24 26 107 103 99 62 65 32 120 91 43 102 116 34 104 73 11 Protecting Investors 2 1 5 3 19 9 5 5 51 64 15 12 51 51 33 158 33 33 12 83 98 51 50 4 122 83 11 12 5 64 64 98 33 19 9 33 33 83 83 19 19 107 64 33 107 33 98 33 64 64 107 19 51 19 19 83 64 15 107 64 19 64 64 Paying Taxes 2 9 76 3 13 12 25 6 41 27 16 105 83 42 89 15 31 102 65 67 36 20 7 56 80 71 11 39 69 106 82 122 34 32 61 52 66 93 143 8 108 17 48 135 127 88 24 134 5 91 14 90 122 58 63 113 54 77 47 1 53 18 170

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Annex n.1: Doing Business Index
Economy St. Kitts and Nevis Panama Colombia Trinidad and Tobago United Arab Emirates El Salvador Grenada Kazakhstan Kenya Kiribati Poland Macedonia, FYR Pakistan Dominica Brunei Solomon Islands Jordan Montenegro Palau China Papua New Guinea Lebanon Serbia Ghana Tunisia Marshall Islands Seychelles Vietnam Moldova Nicaragua Kyrgyz Republic Swaziland Azerbaijan Croatia Uruguay Dominican Republic Greece Sri Lanka Ethiopia Paraguay Guyana Bosnia and Herzegovina Russia Bangladesh Nigeria Argentina Belarus Nepal Micronesia Yemen Guatemala Costa Rica Zambia West Bank and Gaza Uganda Bhutan India Honduras Brazil Indonesia Lesotho Algeria Egypt Malawi Ease of Doing Business Rank 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 Starting a Business 79 31 88 40 158 130 32 57 112 86 129 21 59 23 117 85 133 98 56 135 76 132 90 138 68 15 48 97 81 70 49 142 64 93 151 84 152 29 106 66 86 150 50 92 80 114 119 60 46 175 128 113 82 166 114 52 111 135 122 168 126 131 55 108 Protecting Investors 19 98 19 15 107 107 19 51 83 33 33 83 19 19 121 51 107 19 165 83 33 83 64 33 147 147 51 165 98 83 33 175 107 122 83 122 158 64 107 51 64 83 83 15 51 98 98 64 165 122 122 158 64 33 122 122 33 147 64 51 141 64 83 64 Paying Taxes 85 169 167 45 4 101 59 44 154 10 125 99 146 64 28 26 19 129 73 168 79 33 121 75 148 74 35 128 111 156 152 40 141 43 131 139 86 158 29 93 100 142 130 81 107 147 178 92 70 84 116 162 30 22 55 68 165 160 137 110 49 157 150 78

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Annex n.2: Doing Business Index
Economy Ecuador Morocco Tanzania Gambia Cape Verde Philippines Mozambique Iran Albania Syria Uzbekistan Ukraine Bolivia Iraq Suriname Sudan Gabon Cambodia Djibouti Comoros Haiti Madagascar Rwanda Benin Zimbabwe Tajikistan Cameroon Côte d'Ivoire Togo Mauritania Mali Afghanistan Sierra Leone Burkina Faso Senegal São Tomé and Principe Lao PDR Equatorial Guinea Guinea Angola Timor-Leste Niger Liberia Eritrea Venezuela Chad Burundi Congo, Rep. Guinea-Bissau Central African Republic Congo, Dem. Rep. Ease of Doing Business Rank 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 Starting a Business 148 51 95 94 156 144 125 77 123 169 54 109 157 164 163 95 147 162 165 145 170 61 63 137 143 161 160 155 176 167 149 24 89 105 159 126 78 172 171 173 140 153 141 174 134 177 124 154 178 139 146 Protecting Investors 122 158 83 165 122 141 33 158 165 107 107 141 122 107 174 141 147 64 173 122 158 51 165 147 107 176 107 147 138 141 147 178 98 138 158 122 176 141 165 51 122 147 138 98 165 122 147 147 122 122 147 Paying Taxes 57 132 104 173 117 126 72 97 118 98 159 177 172 37 23 60 93 21 51 46 96 86 50 161 144 155 166 140 138 171 151 38 145 133 164 153 114 136 163 120 62 115 119 103 174 124 109 176 112 175 149

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