According to World Bank Group, Findex data, close to one-third of adults – 1.4 billion are still unbanked (2021). This is due to the fact that a majority of the population in developing countries, especially in rural communities, is excluded when it comes to access to financial services.
This is a reflection of the population in developing countries and specifically those in rural areas. Consequently, they have limited access to banking solutions, credit applications and available insurance products despite their vital role in food production; thereby, stifling both personal and community growth in the long run.
With evolving economies, the need for financial inclusivity in rural communities is dire. Microfinance institutions have emerged as a powerful tool in ensuring that rural populations are geared towards financial stability by providing individuals, cooperatives and MSMEs with access to capital to boost businesses.
Faulu microfinance bank is an excellent example of institutions making significant difference in rural Kenya. It has positioned itself as the ‘traders bank’ with a strong focus on cooperatives and Micro, Small, and Medium Enterprises (MSMEs). Additionally, it offers diverse financial products such as personal and business banking solutions, transactional/saving solutions and insurance solutions personalized to the needs of the rural clients. This has enabled individuals and businesses to save for emergencies and protect themselves against financial risks due to unforeseen circumstances.
Among the most profound impacts of microfinance in rural areas is women empowerment. With women making up 49.6% of Kenya’s population, it’s indisputable that they play a major role in the country’s economic development.
As a result, any initiatives that promote financial independence amongst women ultimately contribute to improved living standards in communities.
Meanwhile, microfinance institutions stand as critical avenues to affordable credit. For instance, in agribusiness they provide support through the necessary resources/capital to boost production, improve yield – ultimately alleviating poverty. This is through provision of financial services to buy seeds, fertilizers, purchase or production of high-quality feeds for animals and procurement of farming equipment. Eventually, the growth in these businesses leads to employment and overall economic evolution.
Yet, despite their potential for all-round financial inclusion, microfinance institutions face challenges. Over-indebtedness is a concern, with some borrowers taking on more debt than they can manage. Geographical isolation and lack of financial literacy has also led to mistrust in formal banking systems among far-flung rural populations in the country. It is no surprise that some rural populations in Kenya, particularly small scale farmers and informal traders lack avenues for growth and investment opportunities.
However, with microfinance becoming popular, many barriers to formal lending products have been broken. With the rise in flexible repayment terms, small scale entrepreneurs can easily get microloans to boost productivity and reduce financial strain than relying on informal lenders who charge exorbitant interest rates.
As this happens, the integration of digital technology in microfinance, for instance through the use of mobile banking, continues to extend round the clock financial services to remote rural areas while offering convenience by eliminating the need for physical trips to financial institutions. The convenient access to digital banking allows clients to enjoy secure transactions and real time notifications when money is debited or credited from their accounts. Also, whilst making transactions, customers receive prompts of confirmation of payment thus giving them a sense of security over their dealings.
For added impact, microfinance institutions should increasingly integrate financial literacy in their services through workshops and training programs. This will empower the rural clientele with the knowledge and skills needed to effectively manage their finances. Such training will also help their customers make sound investment choices by understanding how to save, manage their loans and plan their businesses. This will ultimately lead to increased household income and overall economic growth and stability.
As we look into the future, it’s imperative to continue with innovative and tailored microfinance solutions to meet the unique needs of rural populations. With commitment and partnerships from the government, microfinance institutions, local NGOs and the society at large, everyone in the country is assured of access to affordable financial services.
By Julius Ouma – Chief Executive Officer at Faulu Bank