Entrepreneurs and informal finance in Kenya

Abstract

The future of a country is closely tied to its economy, and entrepreneurs have a direct impact on that future. Many Kenyans are underserved by formal financial institutions, despite Kenya's relatively robust banking structure when compared to those of other African nations. Kenyan entrepreneurs can, however, turn to alternative finance options like microfinance institutions (MFIs) and rotating savings and credit associations (ROSCAs). In this paper, the success of these two alternative finance institution types is judged in terms of their respective abilities to create economic growth and improve individual welfare. In general, while MFIs targeted toward entrepreneurs, like the Kenya Women's Finance Trust (KWFT), present a more direct causal link to business growth, ROSCAs are more prevalent and are in a better position to increase individual welfare. In the future, MFIs should adapt their lending practices to leverage some of the cultural aspects of group-centered lending that are firmly embedded in ROSCAs. By doing so, MFIs will lower their transaction costs and ensure they are better able to operate in the future. Similarly, as new financial technologies like mobile phone-based banking emerge, MFIs and ROSCAs must adapt to remain competitive options.