Kenya has licensed a former non-governmental organisation as a fully-fledged bank for the first time in Africa, paving the way for a new breed of micro-financing institution serving the continent's rural communities.

The Kenya Rural Enterprise Programme, or K-Rep, intends to replicate the success of Bolivia's Banco Sol, by providing loans on a commercial basis to groups with little access to traditional finance.

"There is a strong connection between poverty and the provision of financial services. Where the bulk of the population lives a permanently disorganised financial life, it makes it difficult to achieve meaningful development," says Kimanthi Mutua, the bank's managing director. "But K-Rep is not a charity, it is an economically viable enterprise with a powerful developmental impact."

K-Rep is one of only around five NGOs in the world which have transformed to a fully commercial organisation, pursuing profits and growth.

As such, Mr Mutua was following a path paved by Banco Sol - which, he said, was Bolivia's most profitable bank last year - rather than the famous Grameen Bank in Bangladesh, which retains a more traditional developmental focus.

While commercial banks shy away from small-scale lending, citing high costs, an uncertain legal environment and unquantifiable credit risks, K-Rep, building on 15 years of donor-backed micro-financing and lessons from Latin America and Asia, says it has developed systems which it make low-level finance a highly profitable activity.

Its strategy is to lend to community groups of 20-40 people, represented by one creditworthy individual. Typically that group will borrow between $10,000-$20,000 (6,270-12,540), with individuals taking one or more loans of $300 (188) each on a staggered basis - typically to finance small retail outlets or simple manufacturing businesses.

The loans are guaranteed in several ways. First, the representative individual bears responsibility, both legally and within community structures. The group as a whole is also liable - it is registered as a legal entity, and members place 10 per cent of the loan in a common pot. This usually covers average defaults of less than 5 per cent.

Finally, rogue individuals within the group can also be held accountable. Local chiefs and community leaders form an important guarantee - either by helping to cover a debt, or by pressing defaulters to repay through the sale of small-scale assets, such as a bicycle.

"We are increasingly using non-traditional collateral," says Mr Mutua. "Ninety per cent of people live within these systems, and we are trying to bring them back into the mainstream."

Costs are kept down in several ways. Loans officers are school leavers with a relevant diploma, meaning salaries are not as high as on the high street. Most business is conducted within the community, such as a marketplace, so offices are basic and productivity is high.

Interest rates are also on the high end, at 35 per cent per annum, but loans are kept small and short term. The rates compare favourably with loan shark operations, which charge as much as 60 per cent per day and are often backed by violence.

Mr Mutua says that in the past K-Rep has made a return of 20 per cent on its capital, and he expects that to increase. The bank currently has a paid-up shareholder capital of Ks500m, with backers such as the International Finance Corporation, Triados Bank and Shore Bank.

Within five years, Mr Mutua intends to float on the stock exchange, encouraging local communities to invest in the organisation.

Although the transition from NGO to bank has led to changes, Mr Mutua says it has not been necessary to overhaul K-Rep's philosophy.

"We are taking a more corporate outlook, changing titles and so on, but we want to retain our NGO approach," he said. "For us the bank is a means, not an end. We don't have to change what we do to what banks do; what we are saying is that what we do is bankable." Source: © Financial Times, 1 June 1999