Mid-term evaluation of the loan to the Kenya Commercial Finance Company, Limited and grant to the Kenya Commercial Bank, Limited

(KCFC). Special evaluation covers the period 1/83-10/84 and is based on analysis of the KCFC loan portfolio and interviews with USAID/K and KCFC personnel and with subborrowers. The project's development impact is evident. KCFC has made 38 loans (averaging $43,000), 37 of them to small enterprises, and over half to very small (fewer than 10 employees) enterprises; 74% of the loans have been made to first time entrepreneurs and the remaining loans have helped existing firms expand operations, diversify product lines, and/or replace equipment. Women are either sole owners or (more typically) partial owners of 35% of the firms to which loans were made. Loan recipients represent a cross-section of Kenya's ethnic and racial groups; the majority (71%) are involved in food processing activities. Draw down of A.I.D. loan funds is behind schedule, however, primarily due to KCFC's limited marketing efforts, the high interest rate charged (19%, the maximum allowable in Kenya), and cumbersome A.I.D. procurement regulations. KCFC loan management is equal to or better than the general level of bank performance in Africa; there has been excessive dependence on collateral, however. The project's Business Advisory Services (BAS) component - to be funded through a grant to KCFC's parent firm, the Kenya Commercial Bank (KCB) - has not been implemented partly because of insufficient management attention by the understaffed AID/PRE Office of Investment, but also due to organizational problems at the KCB, and to unrealistic expectations regarding BAS. While it is important that A.I.D. realize the limitations of commercial banks, this experimental project has proven that term lending to small- and medium-scale rural enterprises through the commercial banking system is a viable development strategy; replication in other countries is suggested. Other recommendations are to hire a local project manager; implement BAS as soon as possible; try to reduce the interest rate charged; and permit lending to agribusiness operations that include agricultural production.