Microfinance in Africa is considered an instrument for convenient and affordable financial services. It primarily refers to providing small-scale financial services to the users. There are 14 microfinance lenders in Kenya offering financial services to nearly 8.5 million micro, small and medium enterprises across the country. They work with their clients to build solutions for underserved businesses and individuals.
In Kenya, microfinance institutes (MFIs) lay a significant impact on the economy. They provide financial services to the people at the local level without much paperwork and long processes. They aim to improve financial access and boost entrepreneurial activities leading to economic growth and poverty reduction.
The microfinance sector in Kenya faces many issues such as high operation costs, lower visibility, credit risk, and changing user requirements. These challenges are majorly due to a lack of innovation and limited uptake of financial technologies (fintech).
Innovation seeks to develop a more efficient system of doing something. Innovation may lead to cost savings, reduction of time, and improved delivery of services. If done rightly, it can also bring a competitive edge to businesses with better growth and sustained profitability. How MFIs use innovation to solve their challenges?
- Innovation to reduce cost – MFIs and other financial institutions have to bear high costs to offer services as they are majorly dependent on legacy systems. It includes constant human efforts which can be time-consuming and prone to errors. With innovation, financial institutes can replace legacy systems with digital systems that can significantly save time and efforts to reduce costs. They can constantly research for new and better ways to offer services while reducing the overall costs. Furthermore, innovation can enable improved and personalized services which may improve profitability.
- Innovation to reduce time consumption – Adoption of innovation strategies can ensure that large volumes of transactions can be made and recorded in less time compared to traditional methods. The requirement of human efforts can be reduced and there will be fewer chances of human errors. Innovation can also lead to reduced time in follow-up with customers, service deliveries, and other critical operations.
- Innovation to reduce credit risk – 85% of micro, small, and medium enterprises in Kenya operate in the informal sector. It hinders their access to credit and financial services due to limited credit information and increases credit risk for financial institutions. Adopting innovation can give rise to intelligent ways of calculating the creditworthiness of businesses and individuals. They can easily identify potential risks and make well-informed lending decisions.
- Innovation to adapt to changing market needs – Financial needs of businesses and people are changing rapidly. They want personalized solutions that suit their needs and meet their specific requirements. Innovation can bring capability and flexibility to financial institutions to enable them to adapt to the changing market. They can quickly change the way of working, remove unwanted operations and deliver what the users desire.
Innovation can be an instrument to develop new ways of delivering financial services. It can improve the financial performance of microfinance institutions in Kenya while reducing various challenges they face. As discussed above, they can reduce the cost, time, and efforts required in undertaking and recording transactions, reduce credit risk and enable well-informed decisions. However, innovation comes at a cost. It becomes highly essential to constantly look forward to the latest trends and identify opportunities and risks for successful implementation.