Kenyans Thrive on Loan Program

YOU can measure progress along the dirt paths of a slum here in terms of more shoes, doughnuts, and beds. From a narrow display rack made of sticks, proud Kenyan merchants Julius Gikonyo and his wife, Esther Wanjiru, have started selling dark leather shoes, and brightly colored plastic shoes of red, green, yellow, and blue. A few yards away, the couple is also selling more Mandazi, or doughnuts, than before, in their tiny, two-table cafe.

And on a nearby path, Daniel Ngigi Mungai has expanded his small carpentry business, with new kinds of wood, and greater production of wooden beds.

Using $400 ``peer-pressure'' loans (if you don't repay, your friends have to) these are among the small Kenyan merchants boosting sales and incomes under a program sponsored by the United States Agency for International Development (AID) and the Ford Foundation.

And, unable to get bank loans because they are considered too poor, these borrowers are also showing that the poor can be a good investment. Their loan payback record is better than perfect, because many borrowers are paying off the loans faster than required. When loans are paid off, new profits from the expanded businesses may be small in global terms, but locally they can make a big difference.

``If I can make more profit I can buy land,'' Mr. Gikonyo says, as he and his wife arrange their display of shoes next to the clothing they already were selling. He owns two acres in central Kenya but would like to buy more. He used most of the $400 loan to buy the shoes and the rest to buy a greater stock of flour, boosting sales of doughnuts in the cafe.

His wife has a plan, too, on use of added income: ``I want to buy a sewing machine.'' By doing tailoring work, she could further supplement the couple's income to support three young children.

At his carpentry shop, Mr. Ngigi also plans to buy more land, and perhaps move to the country, escaping the crowded Kibera slum with its culverts of raw sewage, lack of running water, and sparse electricity.

Ngigi's wife, Miniffer Muthoni, wants to expand the inventory in their small, general store, from where their young son, Jimmie, likes to look out through the grill-covered windows.

``The media is full of stories of Africa falling over the brink: Things don't work,'' says Richard Yoder, managing director of Kenya Rural Enterprise Program (KREP), the nonprofit, private organization that runs the $400-loan program. ``This is a case, I think, where you have an African organization [he is the only non-Kenyan on the 35-member staff] that, in fact, is working - that can become fully sustainable. Funds don't get ripped off; people are highly motivated.''

The program is modeled after the Grameen bank in Bangladesh, which has inspired similar lending schemes in parts of Latin America and Asia. Loans are made to individuals, but only after five people form a group.

The five have to agree to pay small, monthly deposits ($8 each in Kenya) into a savings/loan guarantee fund jointly operated by the borrowers and the sponsoring organization. Borrowers agree that if one person falls behind in loan repayments, the savings deposited can be used to cover the gap and the sponsor can refuse further loans to anyone in the group until payments by all five persons are up to date.

But what often happens, says Albert Mutua, deputy managing director of KREP is that the other borrowers want to leave the savings untouched, so they ``dig into their pockets and repay the loan,'' collecting later from the delinquent member of the group.

KREP used to make loans to individuals without the back-up of a group. Loan repayments under the old program were 75 percent. The better-than-perfect payback under the new program is due to the peer pressure, Mutua says.

THE new program is also quicker and cheaper. During three years of the old program, about 3,000 loans were made. In the first four months of the new loan scheme (through January 1991), nearly 2,000 loans have been made. And administrative costs, formerly $1.75 in for every $1 loaned, are now only 25 cents per $1 loaned.

``We are excited about the way the new approach to small-enterprise lending is expanding the number of beneficiaries and getting closer to being self-sustaining,'' says Stafford Baker, projects officer in Kenya for AID. Mr. Baker and the KREP staff plan to try to encourage more loans to people making things instead of selling things, so more jobs can be created.

Women account for about 60 percent of the borrowers.

The KREP staff has been asked to help set up peer-pressure loan schemes in Uganda and Tanzania. And AID is considering starting similar loan programs in other African countries.