Accelerating Change in the Somali Microfinance Sector

September 16, 2022

North Africa

Dominique Wells, Impact Analyst

As Somalia continues to recover from over two decades of a brutal civil war that decimated local institutions, the absence of a formal financial sector has left Somalis predominantly dependent on remittance companies for the $1.736 billion in annual diaspora inflows, which account for 35.3 percent of gross domestic product (GDP). 73 percent of the population live in absolute poverty, 80 percent in ruralities while youth unemployment stands at 75 percent. While overall peace and stability in Somalia has improved in recent years, there are still security challenges in several areas, mainly in the South-Central part of the country. Yet in spite of the country’s peace dividend, financial markets remain nascent and capital remains a key constraint, particularly for microfinance institutions that are not affiliated with banks. It is estimated that less than 5 percent of Somali micro and small enterprise (MSE) needs for finance are being met, which suggests a market of over 2 million MSE clients across Somalia, many of which are prevented from accessing conventional enterprise financing channels due to informality. 

In addition, a large percentage of the population remain unbanked with only 7.9% of Somalis, aged 15 and above, having an account at a financial institution.

Historically microfinance in Somalia has been dominated by charitable organisations targeting small income-generating activities of the rural poor. There has also been limited focus on the commercial viability of the borrowers and weak systems to recover repayments. Furthermore, clients often considered the funding as “free money” and had little motivation to repay.

KIMS Microfinance 

The challenges faced in the financial sector have presented a significant opportunity for Kaah International Microfinance Services (KIMS) to contribute to the economic and social development of low income populations in Somalia by providing high-quality shariah compliant microfinancing (Murabaha financing) to creditworthy MSEs.

KIMS is the Somali market leader in the provision of Sharia compliant microfinance services. Since 2014, KIMS has provided more USD $30 million in financing to over than 31,000 micro and small enterprise (MSE) loan clients. As of September 2022 KIMS has an active portfolio of more than 4,500 clients with a Gross Loan Portfolio (GLP) of $2.55 million spread across its 9 active branches across Somaliland, South-Central Region (including Mogadishu, Kismayo, Beletywne and Afmadow) and Puntland.

Beyond its core financing sectors of retail, commerce, small scale manufacturing and hospitality, KIMS has also expanded into the provision of value-chain financing, such as their support to the fisheries sector financing in lower Juba and Kismayo demonstrates.

In 2021, they piloted an innovative group loan product, which enables more vulnerable yet economically active clients who are unable to provide collateral or obtain a personal guarantor to access microenterprise financing from KIMS through a mutual guarantee model. This group loan product is the first-of-its-kind in Somalia via two branches which now has over 1,075 active clients with a GLP of USD$244,394

Altogether, KIMS’ sharia-compliant products and support are tailored to the needs of borrowers, resulting in them serving a diverse range of client needs, through a growing range of microcredit products. 

By the same token, KIMS recognises that supplementary support, technical assistance and community outreach are essential elements in encouraging strong repayment rates among higher risk, displaced or low-income individuals. The organisation has provided financial literacy training to 5,000 borrowers and business skills training to over 1,000 youth clients, while all refugee returnees were provided with additional skills training relevant to the local labour market. As a result, despite challenging security situations in some parts of the country, KIMS has built a strong culture of loan repayment among its clients.

Commitment to Impact 

Innovest Advisory has worked closely with KIMS to understand their impact of their MSE financing. KIMS, with close support from Innovest developed a Theory of Change and then identified impact KPIs and metrics to track the impact of its business in alignment with its SDGs.

KIMS recently worked with Innovest to develop a client survey to understand the impact of their business on the livelihoods of their clients in Somalia. The survey was built off their Theory of Change and their KPIs and metrics. 

Innovest designed a web survey  that obtained both quantitative and qualitative data. We worked closely with KIMS to ensure that questions were culturally appropriate and captured KIMS’ approach to conducting business. We also worked with KIMS to translate the survey into Somali. 

Due to the nature of their relationship with clients, KIMS investment officers were tasked with administering the survey. They were trained on how to explain the purpose of the survey to clients and how to guide clients through the process of survey completion.

Prior to the survey going live, the survey was tested amongst managers and investment officers to ensure that it met the standard that KIMS required. 

The survey was administered over 10 business days across all KIMS branches. Investment officers conducted surveys in person via WhatsApp. 2,187 clients were surveyed which represents 38% of KIMS client base. 

From this survey, KIMS was able to identify the following: 

  • 64 percent of its clients are women, 61 percent are youth (aged 18-34) and 26 percent are displaced populations (refugee returnees from Kenya and Internally Displaced Populations)
  • 94% of respondents stated that financing from KIMS helped improve their businesses performance
  • 3,738 jobs created and sustained 
  • 66% average increase in clients’ incomes after receiving a loan 

The increase in income resulted in: 

  • 38% of respondents increasing education spend 
  • 27% of respondents paying  for better quality food
  • 21% of respondents covering healthcare costs

The data gathered from the survey is presented using an online impact dashboard. KIMS is using this data to better inform and enhance its own service provision. 

Furthermore with the ability to capture output, outcome and impact data at scale and on a nearly real time basis, KIMS is now able to more effectively communicate evidenced based impact results to investors and other interested stakeholders.