FAULU KENYA LIMITED/
USAID MICROPED GRANT FUND
Award No. 623-A-00-01-00005-00
INSTITUTIONAL STRENGTHENING AND 
CAPACITY BUILDING PROGRAMME
FINAL EVALUATION REPORT
By:
Ruth Odera
Gervase Odiko
Francis Ogutu
Microfinance House Ltd
March 2004
M f H 
ii
APPRECIATION
This report contains the results of an evaluation of the “Institutional Strengthening and 
Capacity Building Programme” funded by the USAID MICRO-PED Grant between 28th
February 2001 and 28th February 2004. Mrs Ruth Odera of Microfinance House Limited in 
collaboration with Gervase Odiko of Microde Consult and Francis Ogutu of Lattice
Consulting carried out the evaluation.
The evaluation exercise was undertaken between February 27th and March 26th 2004. During 
this period, the team held discussions with Faulu management team at the head office and 
with the board of directors at their offices. The team evaluated all the major aspects of the 
grant based on the Terms of Reference (Ref. Annex 1).
The evaluation of Faulu was carried out on the basis of information and data presented by the 
management of Faulu - information which they fully relied on with minimum verification. 
The evaluation work was feasible because in most cases, information and up dated data was 
available at the head office. The management team was very open and supportive in 
discussing all the issues during the whole evaluation exercise. The team acknowledges this as a 
great achievement for Faulu Kenya.
The team wishes to express its appreciation to Faulu Kenya management and board members 
for their collaboration and hopes that this exercise will move Faulu towards its main goal of 
becoming a leading provider in microfinance in Kenya.
The views expressed in this document are those of the consultants and do not in any way reflect the views of 
Faulu Kenya or USAID. Our report is based on information available to us through various interviews and 
high-level discussions with various staff of Faulu Kenya and USAID. 
iii
DEFINITIONS
Acronym Definition
CAGR Compounded Average Growth Rate
CEO Chief Executive Officer
DFO Development Finance Officer
DOS Disk Operating System
EVA Economic Value Added
FAO Food and Agricultural Organisation of the United 
Nations
FKL or Faulu or Faulu Kenya or The Company Faulu Kenya Limited
GTZ German Agency for Technical Cooperation
LSF Loan Security Fund
MBWIN MicroBanking System for Windows
MMR Monthly Monitoring Report
CSR Client Status Report
PTR Period Transaction Report
USAID United States Agency for International Development
PEP Participatory Evaluation Process
The Project USAID Micro-PED Grant Funded capacity building 
project at Faulu Kenya Limited or its sub-projects
iv
EXECUTIVE SUMMARY
This report covers an evaluation of the “Institutional Strengthening and Capacity Building 
Programme” implemented by Faulu Kenya Limited. The aim of the programme was to 
improve the capacity of Faulu to become a leading provider of financial services to small and 
micro-entrepreneurs in Kenya. The U.S. Agency for International Development (USAID) 
funded the three-year programme under the MicroPED Grant fund. USD430,450 was availed 
for (a)Strengthening the role of Faulu Board of Directors through workshops and exposure 
visits; (b) Developing human resource through training and exposure visits (c) Developing 
new products/services and strengthening lending procedures and operations; and (c)
Upgrading the loan tracking system, improving management information system and
establishing internal control systems. 
The purpose of this final evaluation was to assess the effectiveness of the intervention against 
the aims and objectives set out in the proposal. Specifically, the consultants were expected to:
ß Assess the progress of the project in achieving its objectives;
ß Assess the efficiency, effectiveness of the project implementation mechanisms;
ß Determine the impact of the project on Faulu Kenya;
ß Provide specific recommendations for Faulu Kenya and USAID that will guide the design 
and implementation of similar projects in future.
Major Findings
A. Progress of Project in Meeting its Objectives
The evaluation revealed that the implementation of the programme activities under the 
Institutional Strengthening and Capacity Building programme implemented by Faulu was right 
on track despite major challenges experienced. Some of the major challenges Faulu
experienced during the implementation of the programme included timing of all the activities 
to fit into the programme time-frame and the large magnitude of activities taking place 
concurrently. By the time of the evaluation, the programme had achieved the following 
progress.
Strengthened the Board of Directors to provide Governance
Faulu Board of Directors were trained in corporate governance and are now well - informed 
on matters relating to microfinance. Faulu board members have skills as leaders and have a 
clear vision of where Faulu should be in the long-run. They have fully bought into the mission 
of Faulu and are alert to its performance. The Board of Directors have developed a Board of 
Director’s Handbook which among other things clearly defines the responsibility between the 
board and management, functions, structure, systems and styles. The handbook also has 
chapters on board meetings, frequency agenda and board information on decision making. 
v
Developed Human Resource 
Faulu has well-trained professional staff capable of responding to organizational change 
currently taking place and to client needs. Staff underwent several training courses which 
included induction training for new staff, computer package training and functional training 
for old staff. The Chief Executive Officer underwent training at the Stanford Business School 
and one board member and eight senior staff of Faulu participated in an exposure programme 
in Bangladesh. Two members of staff attended the Microfinance Summer Academy Course 
conducted in Boulder/Frankfurt, Germany a two-week microfinance course offered during 
summer of every year.
Developing New Products and Services
Faulu developed, branded and rolled out three business loans and two consumer loans. The 
branding of the products provided identity necessary for differentiation. The products
included Pamoja, a basic business loan for working capital for first-time micro and small-scale 
business clients currently without experience with formal financial services; Fanaka, a working 
capital loan for existing clients who require larger amounts than Pamoja loans; and Fanaka Plus, 
a loan product for relatively bigger growth businesses which enables the “Jua Kali” enterprises 
excluded from financial services by both microfinance and mainstream financial institutions to 
access credit in smaller self-selected groups. Elimisha loans are a school or college fees loan 
and Mara Moja a loan for emergencies.
Strengthening Lending Procedures and Operations
After the launching of the new products, Faulu experienced a lot of constraints in its internal 
system. It undertook a major restructuring in order to improve efficiency and balance its own 
needs and those of clients. Apart from re-allocating its business units to improve client service, 
it has reviewed its target market, collateral policy, client incentive system, loan officer incentive 
systems and interest rate structure. As a result, the delivery system and mechanism is more 
responsive to client needs. A lot of work is still being done to ensure that there is optimal gain 
from the current delivery system.
Loan Tracking System, MIS and Internal Control System
The Loan Tracking System was implemented and the software and hardware to run the MS 
Exchange e-mail system has been purchased and installed and the system is operational. 
Another project, the Business Process Improvement project and is currently going on. The 
internal audit system is in place.
B. Impact on Faulu
Overall, the key financial impact of the project has been very positive, but it has also presented 
some challenges that Faulu did address. By the time of the final evaluation, there was:
ß A significant improvement in the economic value added (EVA) by the company from a 
value-destroying position in 2000 to 2002, to a value creating position in 2003 – meaning 
vi
that if this is sustained, then the company is in a good position to raise additional 
commercial equity if it so requires;
ß Rapid growth beyond Faulu’s sustainable growth rate has led to significant improvements 
in profitability;
ß Achievement of financial and operational sustainability;
ß Consistent improvement in operational efficiency;
ß A very positive and growing impact on job creation and stabilisation;
ß A very positive impact of LTS project on Faulu as it has enabled Faulu to cope with the 
rapid growth in the last three years;
ß A very positive impact on the staff, leadership and board abilities to manage and provide 
governance;
ß A very positive impact on Faulu’s capability to undertake new product development and 
refinement; 
ß Deterioration in the quality of the loan portfolio;
ß Regulatory exposure through funding advances out of the loan security fund (LSF). 
C. Efficiency of the project implementation mechanisms
Efficiency is gauged by whether the results were obtained at reasonable costs (financial) and 
how well the means (financial, time, human resources) and activities were converted into 
results. Overall the implementation of the project was efficient in terms of costs and 
conversion of activities into results. The main components that posed efficiency challenges 
were in the MIS where cost overruns occurred; and in strengthening of service delivery system 
where operationalization of outputs brought in other problems.
Governance, Leadership and Human Resource Development
The external training, the study visits and other staff training planned for were carried out 
according to plan. The study visit to Bangladesh had representation from all cadres of human
resources: DFOs, middle management, senior management and even one board member. This 
is very commendable as it doubled up as a team building activity. This was therefore found to 
be an efficient use of resources. It is however difficult to measure the efficiency of the staff 
training sub-component as no output reports and plans were availed to the evaluators.
Product Development and Strengthening of Service Delivery System
The implementation of Product Development component was efficient because: (i) most of 
the original work plans starting from the assessment and analysis of Faulu Kenya market and 
clients, and product and strategy development were complied with and at times, targets 
surpassed. For example, according to the proposal, 2 loan products were to be developed and 
rolled out but instead, 5 were developed and rolled out, (ii) Costs through which the 
component was done was reasonable. The estimated person days of complex product 
vii
development1
 using MicroSave-Africa qualitative research tools is 104 days at an estimated 
cost of USD37,000. This is in line with the amount used for the product development process 
which was USD39,4432
. The various activities carried out for the Research and Development 
component were relevant and the resources used were adequate for the activities. 
The process of carrying out the product development activities was professional and adequate 
as it led to the launching of 5 new/refined products which has enabled FKL to grow 
tremendously within the Grant period. The consultancy, through which the activities were 
carried out, was awarded to Fineline Systems and Management Limited, a consultancy firm 
specialised in providing strategic advice, technical assistance, and training to institutions 
involved in microfinance and small enterprise development whose in-house staff and
associates have the accreditation from MicroSave Africa and the expertise to undertake this 
activity. 
The operationalization of outputs from product development posed great challenges for the 
operations department. Faulu had to implement a lot of other activities to ensure that the 
delivery system could cope with growth. 
Management Information System
In the absence of any data on the detailed project plans (including Gantt charts, financial 
breakdown, human resource allocations etc), the review of the efficiency was restricted to a 
review of the variance between budgeted costs and actual costs. There was a 75% overrun in 
the budget for MIS related expenditure. Cost overruns in the LTS project are both an 
indication of poor anticipation of all the components of the project, leading to scope
variations. 
 
1 Graham A.N. Wright “Market Research and Client-Responsive Product Development” pp 11
2 For customer and market intelligence survey of the Kenyan Microfinance sector, training and discussion 
workshops between the consultants and Faulu Kenya, review of FKL service delivery systems and costing per 
service, design and development of product prototypes, revising policies and procedures manual, developing 
marketing market positioning strategies, reviewing of lending operations and costing and pricing of new 
products.
viii
D. Effectiveness
Effectiveness can be gauged by the contribution made by the results to the achievement of the 
project purpose. Overall, the project has been very effective in achieving the project purpose. 
Board efficiency has improved, staff is well trained and can now respond to organizational and 
client needs, Faulu has grown in terms of outreach and is now a market leader in microfinance 
reaching over 20,000 clients with a fairly wide range of products that meets a variety of needs. 
Faulu is also on its way to establishing an efficient delivery system and an MIS system.
Governance
During the evaluation, the team saw signs of improved effectiveness in the manner the board 
conducted its affairs. The board recently set up committees: Executive Committee, Risk 
Management Committee and Internal Audit Committee. These committees are accorded 
specific tasks and they report to the board during their meetings. It was also found out that 
board members go to meetings more prepared. This is because they have realised that to 
participate effectively in board meetings, they have to take time and read board papers and 
minutes in advance. The meetings are characterised by informed discussions, are professional, 
brief and to the point. Even though the availability of plans were reported, the evaluation team 
was not able to find quarterly plans for the board and staff activities to enable it measure the 
elements of effectiveness as seen from the perspectives of the institution. 
Human Resource Development
The purpose of this component was to, among other things; prepare the management and 
other staff members to operate in a private commercial institution. This meant not just 
acquiring technical skills to function, but also changing the thinking of staff from
welfare/relief type of operation. Study visits to successful MFIs in other continents were 
found to be a major eye opener to staff. The staff learnt on the need to simplify and 
standardize operations. External training, especially in internationally recognised institutions 
like the Frankfurt Summerakademie was found to be effective in making staff see the bigger 
picture of the microfinance industry. It had the effect of making staff see where Faulu is vis-à￾vis the other MFIs in the world. These activities were found to have contributed effectively to 
changing staff thinking and attitude.
Product Development
After the launching of the new products, Faulu grew tremendously. Faulu has built up a strong 
market position in its areas of operation and is a market leader reaching over 20,000 clients. The 
product development exercise involved not only contracted consultants but also a cross￾functional internal team from different parts of the organization (personnel, marketing, 
finance, information technology, operations, and human resource departments) as well as 
branch representatives and field officers. The use of internal staff as part of the team during 
the market intelligence and customer survey, prototype development, and launching of the 
new products enabled Faulu to build a strong in-house capacity for product development or 
ix
refinement. Faulu is now able to respond adequately to client needs through its various 
departments and persons developed.
Service Delivery System
The operationalization of product development outputs posed major challenges to Faulu. It 
also did not anticipate the extent to which the very fast growth as a result of the new products 
would constrain the delivery system. Faulu needed to ensure that institutional systems are in 
place to cope with increased administrative burdens that accompany more products, more 
staff and more clients. The procedures should have been sufficiently tested to ensure that the 
staff do not make any mistakes or the operating system should have been ready to support 
growth. The other challenge was the timing of all the events to ensure all was systems-go 
before the launching of the new products. Without all these pre-conditions, there has been 
poor indicators in the areas of portfolio quality, client retention rates and repayment rates. 
Faulu undertook a major restructuring of its operations to make delivery of services efficient. 
The restructuring of operations has led to greater benefits for Faulu as follows:
ß Faulu Kenya now has clear and well-defined lending policies detailed in the Loan Policy 
and Procedures Manual which is regularly revised to take into consideration discussions 
and changes that take place at customer level and industry level;
ß The incentive system is clear and well documented and Development Finance Officers 
(DFOs) are aware of and understand the rewards and penalties; 
ß As of this year, loan delivery is very fast and has reduced from the former 20+ days to 
only 10 working days and is set to reduce even to 5 working days with the implementation 
of the Business Process Improvement project currently being implemented by Faulu 
Kenya; 
ß Faulu’s interest rates are quite competitive and are in line with what the other major MFIs 
in the Kenyan Financial sector are charging. For example, for loans of less than
KShs100,000 the major Microfinance Institutions (MFIs) are charging 18%-24% while 
commercial banks are charging between 14%-23% and Faulu charges has reduced from 
22% to 18% and even goes down to 15% with good repayment records. 
Faulu partners from USAID have ascertained that the project implementation was very 
effective and efficient. During the implementation period, reporting was done according to the 
contractual agreement or fully discussed between the partner and the Chief Executive Officer 
of Faulu in crucial meetings or through written communications. The resources, according to 
the partners, were well-spent.
x
E. Sustainability
Faulu’s current activities can survive even without the continued support from USAID. The 
organization has developed sufficient institutional capacity to continue with leadership, 
governance, operations, and product development. Faulu is set to diversify into other services 
such as salaried loans and business development services – services which are still under pilot 
testing. These will bring in user fees and invariably strengthen Faulu’s position to stand 
survive on its own. Also, Faulu is profitable and could use some of its profits to strengthen its 
current activities and others generated by the Programme.
Having said that, we can add that a lot of changes have taken place in the Kenyan financial 
environment in the past two years, requiring Faulu to take several steps along its growth 
agenda. The MFI Act is in parliament for enactment and MFIs including Faulu may be 
empowered to provide savings and credit services to a larger population. Faulu may still need 
support from USAID in areas of MIS improvement, product development and further staff 
development in preparation for deposit taking.
F. Recommendations
Having discussed the efficiency, effectiveness, sustainability and impact of the project on 
Faulu, the following recommendations are focusing on various issues that Faulu need to 
resolve either in-house or with technical assistance from its partners to improve on its 
efficiency. Faulu has recognized some of the issues and undertaken measures e.g. in areas of 
deteriorating portfolio, MIS, etc. Other measures are also important for ensuring the Faulu 
retains its strong position of a leading provider of services.
I. Governance, Management and Staff Development
ß The idea of a Board of Director’s manual is an excellent one. To be of more use the 
manual should “stay alive” - i.e. it should be continuously up dated with the expected 
performance of each board member. It is recommended that the board consider 
reviewing the manual as a permanent agenda item for the annual board retreats.
ß Reports assist Human Resources Department design training courses to offer to staff 
in future. Without these reports, quality of activities cannot be monitored and 
ensured. It is recommended that Faulu improve in its documentation system.
ß Exposure visits are an important tool for learning. Local ones are even stronger due 
to similarities in environments. It is recommended that FKL include local exposure 
visits in their capacity building programmes.
ß It is recommended that all departments adopt the systems making a brief narration of 
all activities that have been undertaken, plus costs incurred. It should not be left only 
to the Finance Manager to bring out expenditure reports.
xi
 II. Product and Strategy Development
ß Loan portfolio is the largest asset that Faulu has and therefore when the portfolio 
quality worsens e.g. in this case a PaR over 30 days of 19.3%, it should be a matter of 
great concern to Faulu as the risk of not being paid is very high. The benchmark for 
MFIs is usually <10% since most loans are not backed by bankable collateral. There is 
an urgent need to understand reasons for worsening Portfolio at Risk and declining 
effective repayment rates and resolve them. Faulu should start with processing
information from “Tuongee” forums and Suggestion boxes to understand new client 
demands and the nature of that demand. 
ß A great deal of Faulu’s resources is being drained in new recruitments, orientation and 
loan assessments as a result of high client exit. The remaining groups would be 
weaker groups that could easily disintegrate due to the absence of the values that held 
them together. Carry out a market research on client perception to find out reasons 
why Faulu lost 30% of their clients in 2003.
ß Staff could be overwhelmed by the number and complexity of activities that took 
place within the Grant period including the measures undertaken to control the 
growth. Faulu should now consolidate the gains from the institution capacity building 
programme. A lot of systems are on the ground. There is a need to ensure that the 
internal systems work before implementing completely new programmes. Any
programmes now implemented should strengthen the existing ones.
ß In readiness for Deposit Taking, Faulu needs to have relevant infra-structures in place 
for deposit taking in terms of people, products, processes (including MIS), branch 
networks, and support organizations. USAID should support Faulu to understand the 
full requirements of a deposit taking institution e.g. through an institutional assessment 
to enhance institutional preparedness for deposit taking. USAID could also support 
Faulu to develop its staff and leadership in preparation for deposit taking
ß Faulu Kenya and other similar MFIs in Kenya face the challenge of moving to the next 
level in terms of better innovative products that is clearly demand driven. As of today, 
competition is coming from commercial banks that have gone down market and 
offering services previously in the domain of MFIs. In as much as this is good for the 
industry, the MFIs need to envision the market better to understand and cope with 
this competition. USAID could support MFIs in general to understand changes
happening in their environment. The starting point would be to work with the 
Association of Microfinance Institutions in Kenya to collect and disseminate data 
relevant to its members, including Faulu Kenya.
ß USAID could support Faulu to understand the implication of its pilot BDS service 
before roll-out as this will have major implications for internal resources.
xii
III. Management Information Systems
ß This component posed major challenges for Faulu. There were cost overruns in the 
implementation of the current system. Detailed and structured planning of projects is 
recommended to ensure institutional needs are properly diagnosed and costs are 
properly controlled.
ß FKL’s disaster recovery plan (DRP), though existent, is not documented. The fact that 
the plan is not documented implies that FKL is over-reliant on the continued 
employment of the IT Manager and his personal recollection to manage disaster risks. 
FKL is at the stage in its growth when it should be focusing on building the institution 
and reducing reliance on individuals in order to safeguard institutional continuity. The 
DRP should be documented as soon as possible to facilitate delegation and continuity 
should there be a change in the IT Manager position.
ß The large variations in the scope of the MIS related projects may be the result of 
insufficient work done at proposal stage in identifying and prioritising the institutional 
needs of FKL. Future projects of a similar nature to be funded by USAID Micro-PED 
should be preferably be within the context of completed, thorough and prioritised 
institutional needs assessment and a strategy that ensures the recipient of the funding 
has clearly thought the project through and understands their priorities and their 
strategic contexts. 
1
Table of Contents
EXECUTIVE SUMMARY iv
1 Introduction 3
1.1 Background to Faulu Kenya Limited 3
1.2 Project Context 3
1.3 Overall Goal and Specific Objectives of the Project 4
1.4 Purpose of Evaluation 4
1.5 Evaluation Methodology 5
1.6 Evaluation Team 5
2 Financial Performance and other Impacts 6
2.1 Growth 6
2.2 Economic Value - Added 10
2.3 Financial sustainability 11
2.4 Operating efficiency indicators 12
2.5 Portfolio quality indicators 13
2.6 Impact on the Economy 13
2.7 Board Vision 14
2.8 Management Systems 15
3 Finance, Audit and Monitoring 16
3.1 Objectives and Activities 16
3.2 Progress achieved against planned activities 16
3.3 Recommendations for Faulu 18
3.4 Recommendations for USAID 18
4 Governance Development 19
Overview information about the board 19
4.1 Objectives and Key Result Areas 19
4.2 Progress achieved against objectives 19
4.3 Efficiency of implementation 20
4.4 Effectiveness of the implementation 21
5 Leadership and Staff Development 22
5.1 Objectives/Key Result Areas 22
5.2 Planned Activities 22
5.3 Progress achieved against objectives 22
5.4 Effectiveness of implementation 24
2
5.5 Efficiency of implementation 24
5.6 Recommendations 24
6 Product and Strategy Development 26
6.1 Objectives/Key Result Areas 26
6.2 Planned Activities 26
6.3 Achievements against objectives 26
6.4 Effectiveness of project implementation mechanisms 29
6.5 Efficiency of project implementation mechanisms 29
7 Service Delivery 31
7.1 Key Result Area 31
7.2 Objective 31
7.3 Planned Activities 31
7.4 Achievement against objectives 31
7.5 Effectiveness of project implementation mechanisms 38
7.6 Efficiency 40
7.7 Recommendations 40
8 Management Information Systems 42
8.1 Objectives and planned activities 42
8.2 Progress achieved against planned activities 42
8.3 Efficiency and effectiveness of project implementation mechanisms 45
8.4 Recommendations for Faulu 46
8.5 Recommendations for USAID 47
9 Networking 48
3
SECTION I: INTRODUCTION
1 Introduction
1.1 Background to Faulu Kenya Limited
Faulu Kenya Limited is a micro finance company registered in Kenya as limited liability
Company under the Companies Act, and whose majority shareholder is Food for the Hungry 
International (FHI), a Bangkok, Thailand-based Christian relief and development organization 
with operations throughout the world including Kenya. 
Faulu Kenya evolved from FHI project that started in 1991 as a pilot programme working 
with micro microenterprises in the Mathare slums east of Nairobi. It formally became the 
Faulu Loan Scheme in 1992 and officially became Faulu Kenya in October 1994. In 1999 it 
was registered as a limited liability company and today, Faulu Kenya is a sustainable and 
profitable micro finance institution offering financial services to Micro and Small Enterprises 
(MSEs) in urban and rural Kenya. Faulu is currently serving over 20,000 clients. Its total 
outstanding loan portfolio is over Kshs500 million. It has twelve Business Hubs (Units) spread 
across 27 districts in Kenya, and a staff of 118 members. A 7 member Board of Directors 
governs Faulu Kenya.
1.2 Project Context
By the time of its transformation into a legal entity in 1999, Faulu had considerably grown and 
was operationally self sufficient and well on course towards full financial self sustainability.3
 To 
ensure its ability to continue providing services to an expanding market in a profitable and 
sustainable way, FKL needed to diversify its products, broaden target groups and increase its 
commitment to market approach – focusing on sustainability, professionalism and efficiency, 
while at the same time providing clients with appropriate and affordable financial services. 
However, in the year 2000, the board of directors were still newly composed and needed 
essential skills and competencies to run a commercial microfinance company while
management needed to acquire adequate commercial skills to achieve targets and mentor 
junior staff. The staff needed training to cope with plans to diversify and offer a wide variety 
of products and to mentor and train clients. To cope with all these institutional changes, the 
organization needed to establish systems including management information system (MIS) to 
support growth that would be brought about by new products and structures. It was for these 
 
3
The projections obtained from Microfin showed an operational self sufficiency level of 115% in Dec 2000 
and a financial self-sufficiency of 85% for the same month.
4
reasons that Faulu Kenya sought a grant from USAID in May 2000 under the
USAID/MicroPED project to achieve its growth objectives, including providing more
microfinance services to micro and small enterprises. 
Faulu Kenya Limited and U.S. Agency for International Development (USAID) co-signed an 
agreement, under the MicroPED Grant fund to the tune of USD430,450 to fund
“Institutional Strengthening and Capacity Building Programme” for a two year period starting 
28th February 2001 and ending on 28th February 2003. FKL was given a no-cost extension for 
a third year ending 28th February 2004. 
1.3 Overall Goal and Specific Objectives of the Project
The overall objective of the project was to improve the capacity of Faulu Kenya Limited to become a 
leading provider of financial services to further holistic nation and maximize stakeholder value. The 
following four specific objectives were outlined in the programme proposal for achieving the 
project goal. 
ß Strengthen the role of the Board of Directors through workshops and exposure visits;
ß Develop human resource through training and exposure visits for management and credit officers; 
ß Developing new products and services, carry out active research on indigenous systems for micro-lending and 
savings; develop growth and market penetration strategies for existing and new markets; and strengthen 
lending procedures and operations; and,
ß Upgrade the loan tracking system and improve management information system and establishing internal 
control systems.
These objectives were to be met through lateral and top down approach where everyone in 
the institution, starting from the board of directors to customer support officers would 
promote the vision and mission of Faulu Kenya.
1.4 Purpose of Evaluation
The purpose of this final evaluation is to assess the effectiveness of the intervention against 
the aims and objectives as set out in the proposal and give the way forward. Specifically, the 
consultants were expected to:
ß Assess the progress of the project in achieving its objectives;
ß Assess the efficiency, effectiveness of the project implementation mechanisms;
ß Determine the impact of the project on Faulu Kenya;
ß Provide specific recommendations for Faulu Kenya and USAID that will guide the design 
and implementation of similar projects in future.
5
1.5 Evaluation Methodology
The evaluation was carried out in four main steps: review of applicable documentation and 
programme reports, formulation of questions to be used during interviews and discussions, 
discussions and report drafting, presentation of reports to Faulu and further discussions and 
finalization. Mrs. Ruth Odera of Microfinance House Limited and Messrs Gervase Odiko of 
Microde Consult and Francis Ogutu of Lattice Consulting Ltd conducted interviews at the 
Faulu head office and branches and at the offices of board members between 15th and 29th
March 2004. The people consulted included: Human Resources Manager (who stood in for 
the Operations Manager), Chief Executive Officer, Chairman of the Board and one other 
board member, Internal Audit Manager, Information Technology Manager, Marketing and 
Business Development Manager, Finance Manager and officers from the Loan Tracking/Data 
Processing unit; Business Analyst, and one Area Manager. The purpose of these consultations 
was for collecting information required for the evaluation. A consultative meeting was also 
held with a key representative of USAID.
Project literature review was undertaken mainly at the Faulu Head Office but also in the 
consultant’s respective offices. Several documents including proposals for the grant, reports, 
policy guidelines, work plans, etc was reviewed during the evaluation. A series of discussions 
with Managers were undertaken by the team: One consultant focused on the area of
Governance, Management and staff development; another on Research and Development 
/service delivery system while the other on the use of funds impact of the project on FKL. 
The consultants met regularly to discuss, compare and contrast, and collate information 
received from interviews and document reviews.
1.6 Evaluation Team
Microfinance House Ltd won the bid to carry out the evaluation. It teamed up with two other 
consultancy firms Microde Consult and Lattice Consulting Ltd to conduct the evaluation. The 
team leader of the evaluation mission was Gervase Odiko of Microde Consult; he worked with 
Ruth Odera of Microfinance House Ltd and Francis Ogutu of Lattice Consulting Ltd. The 
evaluation started in earnest on 8th March and was completed on 31st March 2004.
6
SECTION II: ASSESSMENT OF IMPACT
2 Financial Performance and other Impacts
All sub-projects undertaken with support from the USAID Micro-PED grant eventually 
translated into financial performance. Therefore, a review of the changes in the financial 
statements over the last four years reflects the impact of all these components. The key 
financial objectives for the project were as follows:
Overall, the key financial impact of the project has been very positive, but it has also presented 
some challenges that FKL needs to address. Key outcomes of the project that are reviewed in 
the remainder of this section include:
ß A significant improvement in the economic value added (EVA) by the company from a 
value-destroying position in 2000 to 2002, to a value creating position in 2003 – meaning 
that if this is sustained going forward, then the company is in a good position to raise 
additional commercial equity if it so requires;
ß Rapid growth beyond Faulu’s sustainable growth rate has led to significant improvements 
in profitability;
ß Achievement of financial and operational sustainability;
ß Consistent improvement in operational efficiency;
ß A very positive and growing impact on job creation and stabilisation;
ß A very positive impact on the board, leadership and board;
ß A very positive impact on Faulu’s capability to undertake new product development and 
refinement; 
ß Deterioration in the quality of the loan portfolio and regulatory exposure through funding 
advances out of the loan security fund (LSF). 
2.1 Growth
FKL adheres to accepted accounting standards and its financial statements for the years 2000 
to 2003 have been audited by Deloitte & Touche, who have given an unqualified audit opinion 
on them. The audit for the year ended 31 December 2003 was on going as at the time of this 
review.
FKL’s profit and loss accounts and balance sheets for the past five years are set out in Tables 
2.1 and 2.2 respectively below:
7
Table 2.1: FKL’s profit and loss accounts (2000 to 2003)
2000 2001 2002 2003
Status of accounts Audited Audited Audited Un-audited
Interest income 85,684 111,682 152,692 238,941
Interest expense (6,953) (9,216) (20,834) (25,948)
Net interest income 78,731 102,466 131,858 212,993
Fees and commissions 11,751 11,574 23,473 21,982
Foreign exchange differences 253 (824) (368) (2,171)
Other income 625 671 1,306 1,705
Operating income 91,360 113,887 156,269 234,509
Administration and operating expenses (85,850) (105,147) (113,319) (125,118)
Provision for doubtful debts (3,192) (3,339) (8,537) (13,164)
Operating profit 2,318 5,401 34,413 96,227
Grant income 22,859 20,886 13,723 7,313
Profit before tax 25,177 26,287 48,136 103,540
Taxation (829) (1,581) (9,335) (28,209)
Net profit for the year 24,348 24,706 38,801 75,331
During the period under review, net interest income grew 2.7 times from Kshs 78 million in 
2000 to Kshs 213 million in 2003, largely as a result of portfolio growth. This growth 
represented a compounded average annual growth rate (CAGR) of 41% per annum.
Over the same period, profit before tax grew 4.1 times at a CAGR of 60% per annum from 
Kshs 25 million to Kshs 103 million. This was largely achieved because FKL’s management 
was able to restrict CAGR in administration and operating expenses to 13% through various 
efficiency initiatives and human resources development.
What is not clear is the proportion of the portfolio growth that is attributable to macro￾economic factors as opposed to FKL’s strategic initiatives. Management is of the view that 
the rapid and significant growth experienced in the period under review is in large part due to 
the capacity building project, and to a lesser extent – exogenous factors in the industry. To be 
able to carry out an objective assessment of this, we would need industry-wide growth data, 
and this is lacking. .
8
Table 2.2: FKL’s balance sheets (2000 to 2003)
2000 2001 2002 2003
Audited Audited Audited Un-audited
ASSETS
Bank and cash balances 23,099 18,766 11,023 19,944
Short-term deposits with banks 45,562 65,821 93,623 116,926
Treasury bills 45,000 22,666 0 0
Government bonds 84,236 82,561 105,398 105,870
Advances to customers 249,163 329,130 693,876 532,889
Due from related organisations 8,724 6,799 985 (26)
Other receivables 12,060 13,342 18,061 19,045
Taxation recoverable 969 763 0 2,415
Deferred tax asset 371 1,616 5,548 5,548
Fixed assets 5,569 7,911 8,827 4,679
Intangible assets 188 633 3,606 9,818
Investment in subsidiary 0 0 0 1,828
Total assets 474,941 550,008 940,947 818,936
LIABILITIES AND EQUITY
Liabilities
Cash collaterals held 145,647 182,914 327,916 362,021
Overdraft 59,705 58,967 275,148 13,452
Loans 13,714 20,000 1,204 23,837
Taxation payable 0 0 9,949 15,781
Deferred income 938 4,213 7,048 7,138
Other liabilities 6,364 10,635 7,984 11,219
Total liabilities 226,368 276,729 629,249 433,448
Capital resources
Share capital 100 100 100 100
Share premium 224,125 224,125 224,125 224,125
Retained earnings 24,348 48,672 85,932 161,263
Proposed dividend 0 382 1,541 0
Total shareholders' funds 248,573 273,279 311,698 385,488
Total liabilities and equity 474,941 550,008 940,947 818,936
Between 2000 and 2003, the total assets of the company grew 1.7 times from Kshs 475 million 
to Kshs 819 million (a CAGR of 20% pa). This was mostly financed by growth in retained
earnings (grew by Kshs 137 million) and growth in client cash collaterals (grew by
Kshs 216 million).
9
A fundamental principle of finance is that a company can only grow at its sustainable growth 
rate4
 unless long-term financing, either in the form of equity or debt, is introduced. During 
the period under review, FKL grew faster than its sustainable growth rate (see table below), 
yet the company declared dividends when it needed to retain the dividends and introduce 
other forms of long-term financing to fund the growth. This would seem to indicate that the 
management was pursuing inconsistent objectives of providing a cash dividend to
shareholders and financing rapid growth. We have, however, learnt that the dividend was a 
special arrangement to reimburse FHI for support received in the form of the loan tracking 
system that was inherited from them, and other forms of financial and technical support. 
Table 2.3: Sustainable growth, portfolio growth and advances financed from the LSF
Year 2000 2001 2002 2003
Dividend payout rate 0% 2% 4% 0%
Sustainable growth rate 9% 9% 13% 24%
Growth in advances portfolio N/K5 32% 111% -23%
% of advances funded by LSF 0% 0% 15% 21%
LSF financing of advances as % of total LSF balance 0% 0% 32% 30%
In 2001 and 2002, the company’s advances portfolio growth rates were 3.5 times and 8.7 times 
its sustainable growth rates in the respective years. As a result, the company had to dip into 
the loan security fund to finance 21% of its advances in 2003 (2002: 15%). The advances 
financed out of LSF funds accounted for 30% of total LSF balances as at 2003 (2002: 32%).
 
4
 Sustainable growth rate is defined as (1-dividend payout ratio)*Return on equity
5
 N/K = Not known
Funding of Advances (2000 to 2003)
0%
20%
40%
60%
80%
100%
Shareholder funds Loans Overdrafts Loan security fund
Loan security fund 0% 0% 15% 21%
Overdrafts 0% 11% 40% 3%
Loans 0% 6% 0% 4%
Shareholder funds 100% 83% 45% 72%
2000 2001 2002 2003
10
As the chart shows, the company also adopted a short-term strategy of using overdrafts to 
finance the growth (up to 40% of the outstanding advances balances at the end of 2002 was 
financed using overdraft). This was not sustainable as it exposed the company’s balance sheet 
to Asset-Liability mismatch risks. Management’s view is however, that the average loan 
duration in their portfolio is six months, making overdrafts more suitable for financing their 
loan portfolio. Nevertheless, Management reduced overdraft financing as a percentage of 
total advances portfolio financing to 3% in 2003.
Management is, however, sensitive to asset and liability risks to the company and has set up an 
Asset and Liability Committee (ALCO) to manage asset and liability mismatch risks more 
proactively.
Although FKL is unregulated, financing advances out of the LSF could be in violation of the 
Banking Act that prohibits a non-holder of a bank licence from making advances from client 
deposits. Specifically, making advances from the LSF seems to be in direct violation of 
Sections 3 and 16 of the Banking Act. However, we have learnt that the management of FKL 
has discussed this matter with the Central Bank, and have been able to persuade the Central 
Bank to take a more lenient stance on the lending of LSF funds.
2.2 Economic Value - Added
The company has recorded significant improvements in the economic value (EVA6
) it has 
added in the last four years. As shown in the graph below, the company has improved from a 
value-destroying position in 2000 to 2002, to a value-adding position in 2003.
 
6
 Economic value is created when a company’s assets generate returns that exceed its cost of capital (both 
equity and debt), and it is destroyed when the cost of capital exceeds the returns. In estimating the cost of 
capital, we have used the long-term observed required returns for equity investors on the stock exchange of 
20% to 30% to estimate the cost of equity, and the after-tax cost of loan financing.
11
Economic value added (2000 - 2003)
(38) (37)
(30)
3
(40)
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
5
2000 2001 2002
The positive economic value added in 2003 also indicates that for the first time, the company 
was able to generate a return on equity in excess of the company’s cost of equity. The 
implication for this is that if this is sustainable, then going forward, FKL may be in a position 
to attract equity financing that is priced on commercial terms.
2.3 Financial sustainability 
The Table 2.4 below summarises FKL’s key financial sustainability indicators for the period 
1997 to 2003:
Table 2.4: Financial sustainability indicators (1997 to 2003)
Indicator / Ratio 1997 1998 1999 2000 2001 2002 2003
Return on Performing Assets 28.5 33.2 28.0 25.7 24.2 25.2 33.1
Financial Cost Ratio 3.0 3.5 2.5 1.8 2.6 3.0 4.0
Loan Loss Provision Ratio 0.7 2.6 - 0.3 0.4 1.2 -
Operating Cost Ratio 49.1 39.8 33.1 22.3 19.7 16.1 18.6
Operating Efficiency ratio 112.0 60.2 46.8 33.8 35.5 24.4 27.5
Imputed Cost of Capital Ratio 32% 29% 18% 14% 14% 13% 7%
Donations and Grants Ratio 35.8 54.2 23.9 6.0 4.7 2.1 0.9
Operating Self sufficiency Ratio 54.8 76.6 78.7 105.3 106.6 124.1 146.0
Financial self-sufficiency Ratio 46.7 63.4 69.1 80.9 95.1 115.3 135.1
Portfolio Yield 33.3 40.6 35.0 35.6 37.0 38.3 55.3
The trend in the financial cost ratio shows the changing mix of funding to include third party 
commercial debt.
12
The loan loss ratio peaked in 2002 because of the introduction of new products in that year 
that the company’s credit risk management systems were unable to cope with. This situation 
was rectified in 2003. The figure for 2003 is NIL because the figures above were pre-audit 
figures. Management has made a provision of Kshs 27 million after the audit.
The operating cost and operating efficiency ratios shows an improving trend in lending 
operations efficiency over the period. These ratios compare favourably to the average ratios 
for the African Medium sized MFIs at 103% and 95% respectively.
The decline in donations and grants ratio is a general trend in the industry, as donors withdraw 
funding from lending activities to capacity building type support. Further, as the MFIs 
transition to commercial entities, their dependence on donor support is reducing.
Consistent with our findings that Economic Value Added has been improving over the last 4 
years, the company achieved financial self-sufficiency for the first time 2002 and consolidated 
this position in 2003. The company’s operating and financial sustainability ratios compare 
favourably against the African Average for the Medium-sized MFI’s (total assets greater than 
US$5.3 million but less than US$11 million).
2.4 Operating efficiency indicators 
Table 2.5 below sets out FKL’s key historical operational efficiency indicators:
Table 2.5: Operational efficiency indicators (1997 to 2003)
Indicator / Ratio 1997 1998 1999 2000 2001 2002 2003
Cost per Unit of Money Lent 0.43 0.21 0.20 0.16 0.14 0.09 0.14
Cost per Loan Made 10,984 7,078 7,434 6,023 5,499 5,146 9,303
Active Borrowers per DFO 101 186 142 170 190 277 224
Loan Outstanding per DFO (KShs '000) 1,683 4,358 4,288 4,540 5,516 11,300 7,953
Following conversion to a limited liability company from 2000 and the focus on a commercial 
focus, the company has made significant improvements in operational efficiency. However, 
there has been an abnormal increase in costs per loan in 2003 as a result of a 23% drop in the 
loan portfolio without a commensurate decline in costs.
The number of active borrowers per DFO has consistently increased to from 170 in 2000 to 
224 in 2003. Despite the significant improvement, this indicator is still far below the average 
for the African Peer group at 423 cases per loan officer.
The loans outstanding per DFO have also increased consistently during the project period to a 
high of Kshs 7.9 million in 2003. The sharp increases in efficiency indicators in 2002, 
13
followed by a decline in 2003 were attributable to a sharp upsurge in loan activity in 2002 
following the launch of new products, followed by a scaling back in 2003 to manage the risks 
resulting from the sudden growth.
2.5 Portfolio quality indicators 
Table 2.6 below shows the trends in portfolio quality indicators:
Table 2.6: Portfolio Quality Ratios (1997 to 2003)
Indicator / Ratio 1997 1998 1999 2000 2001 2002 2003
Portfolio in Arrears [Default Rate] 1.28 1.65 1.47 0.00 3.60 4.25 15.87
Portfolio at Risk 0.00 5.95 5.93 7.91 6.07 7.90 19.36
Loan Loss Ratio 0.77 0.24 0.00 0.97 0.02 0.00 0.00
Reserve Ratio 5.00 5.00 2.00 2.00 2.47 3.26 5.24
Effective Repayment Rate 94.78 92.68 92.00 85.00 79.00 80.00 43.21
The growth in business has been at the cost of a consistent and significant deterioration in the 
portfolio quality, especially in 2002 and 2003. Of considerable concern is the drop in effective 
repayment rate from a high of 94% in 1997 to 43% in 2003. 
The deterioration in the quality of the portfolio has its origins in 2002 when a combination of 
factors led to weakened credit controls, amongst them:
· Launch of new products that were received very well by clients, without the complete 
protocol for rolling out the products being in place
· An upsurge in demand for FKL’s loan products beyond what the company had 
planned that saw the case load per DFO almost double, and strained the institutions 
capacity to make good credit decisions.
FKL made a deliberate decision to scale back in 2003, leading to a 23% drop in the advances. 
This was to enable the company to address the issues that arose in 2002, and although the 
issues were fully addressed, the impact of the 2002 lending have shown up in 2003 statistics. 
2.6 Impact on the Economy
Faulu estimates7
 that three jobs are created for every 10 loans disbursed and 1.6 jobs are 
stabilised for every enterprise that borrows. The company also estimates that five people 
benefit for every client served and that of these five beneficiaries three are children.
 
7
 Based on Food for the Hungry International guidelines
14
It is on this basis that the following impact indicators have been prepared:
Table 2.7: Impact assessment indicators (2000 to 2003)
Indicator / Ratio 2000 2001 2002 2003
Number of Jobs Created 4,629 6,115 8,232 5,798
Number of Jobs Stabilized 15,245 18,534 27,941 24,043
Number of People Primarily Benefiting 114,735 133,300 120,050 148,755
Number of Children Helped (included in above) 68,841 79,980 72,030 89,253
Source: FKL estimates
The number of jobs created and stabilised peaked in 2002, corresponding to the peak in loan 
disbursements, and dropped in 2003 when FKL decided to scale back loan disbursements. 
The movement in the number of people and children benefiting dropped in 2002 despite the 
increase in the loan portfolio because the increase was largely attributable to existing clients 
taking on multiple loans, rather than new clients being added.
Faulu Kenya continues to be sensitive to the role of women in development. At the client 
level, 47% of Faulu Kenya’s clients are women. Faulu Kenya continues to record a steady 
increase in women leadership positions in the client groups in a culture that has had men 
predominant in these positions. At the staff level, 52% of Faulu Kenya’s personnel are 
women.
2.7 Board Vision
It was found out that the various board retreats and corporate governance training workshops 
attended by the board members have greatly influenced the way Faulu Board of directors 
carries out its functions and responsibilities. All the board members now realise that they have 
to prepare for board meetings by spending time to read board papers: the board shares out 
work through the formation of special task committees (e.g. Executive Committee, Risk 
Management Committee and Internal Audit Committee). These committees prepare reports 
which they present to the board meeting for a discussion. This is a more efficient and effective 
way of operating than if the entire board had to do everything.
Faulu Board of Directors were found to have a clear vision of where Faulu would like to be in 
the long run. The board members talked concurred that over the next five years, they wanted 
to see Faulu being:
ß A 10 billion company 
ß A company that offers business development services over and above the 
financial services currently offered
15
ß A company that serves the community in a holistic manner, e.g. concerned 
about health and environmental issues including HIV AIDS.
ß A company that works on the development of leadership of integrity 
(albeit quietly)
The board members were clear that their role was to lead and guide the management including 
setting the targets to be achieved by them while the management runs the affairs of the 
company on a day to day basis. This was not the case in the past as the board chairman was 
very close to company’s day-to-day operations. Individual board members also set targets for
themselves and what they would like to achieve over a given period (usually a year). The board 
members have developed performance evaluation tools for its members. Every year, the board 
members go through a peer evaluation exercise whereby each member carries out a self￾assessment by filling out the evaluation forms indicating how in his/her opinion s/he has 
performed. This is presented to the rest of the team for comments. 
2.8 Management Systems
2.8.1 Management Information System (MIS)
The impact of the LTS project on FKL has been very positive it has enabled FKL to cope 
with the rapid growth in the last three years, something that the previous system would not 
have been able to do as it was tottering on the brink of collapse. 
There is improved the internal control environment as the systems facilitate data validation 
checks and enables audit queries to be run on it by the internal auditors. There is, however, 
still further work needed to be done to fully develop the systems ability to support the internal
audit function
2.8.2 Human Resources
Activities carried out for staff development implanted a strong conviction among staff who 
took part in the study tour that “it can be done.” Apparently, before the study tour to 
Bangladesh there were doubts among some frontline staff as to whether the poor can be 
served in a profitable manner. Staff who attended the Frankfurt training reported better 
understanding of the microfinance sector, the current issues and confidence of putting Faulu 
on the world map of microfinance. The activity conducted instead of the staff motivational 
survey, letters to the management followed by a long meeting that acted as safety valve and 
restored confidence of staff in the management thereby boosting their morale.
Confidence, conviction and better understanding of the microfinance sector all affect positive 
the manner in which one works. 
16
3 Finance, Audit and Monitoring 
3.1 Objectives and Activities
The key financial objectives for the project were as follows:
· To achieve financial self-sustainability
· To perform at a level capable of attracting financing from the capital markets.
It is important to note that whilst activities in other parts of the organisation (such as offering 
new products, and efficient delivery mechanisms) were expected to contribute towards these 
objectives, the Finance Departments specific planned activities towards meeting these
objectives were:
· To evaluate the adequacy of the system of internal control, policies and procedures in 
line with the growth strategy of the firm
· Training and exposure of the management and finance departments staff for improved 
capability in finance raising
· To implement a cost/profit centre model
· To establish and develop bank relationships.
Additionally, specific planned activity for the USAID Micro-PED project included 2 annual 
statutory audits (for FKL as a whole), 2 USAID audits (for the project only) and 2
monitoring/evaluation reviews (for the project).
3.2 Progress achieved against planned activities
To strengthen internal controls, the finance department and internal audit staff has been sent 
on an ICPAK organised fraud detection course. Other courses that the department’s staff 
has attended include:
· Microfin training – for financial modelling
· Tax courses
· ICPAK continuous education courses.
The implementation of a cost/profit centre model has started with the splitting up of the 
branches into distinct reporting entities, as enabled by the MBWIN system. Reporting by 
branches has also been possible but the preparation of the branch reports is tedious, takes 
long, and the reports are not available on demand. Progress has been hampered by:
· The inflexibility of the DOS-based SunSystems. This system is not able to allocate 
shared overheads between the cost/profit centres, requiring tedious additional 
computations to be done outside the system to achieve this. It is expected that this will 
be possible to achieve with the Microsoft Great Plains Financial Management System
17
· The lack of integration of systems, which still requires manual analysis and posting 
from one system to another – this will be addressed by the company’s plans to 
integrate the different components of its MIS.
Currently, all but one of the branches is profitable. The exception is the Mount Kenya branch 
that was recently split up into two units, and needs to rebuild its client base before it can 
achieve profitability.
On relationships with banks and other providers of debt capital, a lot of progress has been 
achieved:
· The company has been able to attract a US$450,000 18-month loan from Blue 
Orchard, an international lender to MFIs at a pricing of LIBOR + 6%. It is instructive 
that Blue Orchard approached FKL with the offer for financing, rather than FKL 
approaching them.
· The company is in the last stages of preparation to issue a KShs 500 million bond in 
the local money market. This bond will be facilitated by a 75% partial guarantee from 
AFD Bank of France, and is expected to be priced at 6% to 7% interest rate per 
annum
· FKL is in the final stages of negotiation with the Co-operative Bank for a
KShs 150 million loan facility, that will be facilitated by a 50% partial guarantee from 
USAID, through the DCA
On audits and evaluations, there were errors in the initial project proposal as follows:
· FKL erroneously believed that it could pay the cost of annual statutory audits out of 
the project funds, but this turned out not to be in compliance with USAID regulations
· According to USAID regulations, projects spending less than US$300,000 a year do 
not need to carry out an audit and project evaluation as defined by USAID, instead, 
financial and project reviews are adequate.
For this reason, no statutory audits have been funded from the project (although they have 
been carried out annually). Similarly, only one post-project closing financial (currently 
underway) and one project review has been undertaken.
18
3.3 Recommendations for Faulu
Issues identified Implications Recommended actions for FKL
LSF funds are advanced to clients Technically a violation of the
Banking Act and despite
management’s assertion to the
contrary, could expose the
company to CBK penalties.
FKL should expedite alternative
financing initiatives to ensure that 
client collaterals are not used to
fund advances
The company seems to have not 
anticipated the full extent of the 
growth that was experienced in
2002.
The company needs to enhance its 
business planning ability and
pursue a policy of controlled
growth. This is more so, going 
forward into the regulated regime 
where uncontrolled growth and its 
implications for capital adequacy
and other regulated parameters
could lead to penalties.
Proactively control growth and
improve ability to anticipate the
future.
3.4 Recommendations for USAID
Issues identified Implications Recommended actions for
USAID
Sector-wide data is hard to come 
by
Benchmarking locally and industry 
wide trends are not clear. This 
makes assignments such as this
review difficult because it is
difficult to isolate exogenous
factors that affect the company’s
performance. 
USAID should consider
supporting an industry database,
preferably to be maintained by
AMFI. This will facilitate reviews 
such as this, facilitate industry
studies and allow competitive
benchmarking to take place
amongst players in the industry.
19
SECTION III: ASSESSMENT OF PROJECT RESULTS, 
EFFECTIVENESS AND EFFICIENCY
4 Governance Development 
Overview information about the board
FKL Board of Directors is composed of six members, one woman and five men. All the 
board members are professionals from the private sector but without prior knowledge of the 
microfinance sector. All the board members bring in different types of skills to FKL. The 
Board has no recruitment committee but the Executive Committee scouts for new board 
members using set criteria including that the person must be a team player, independent 
minded, able to express and stand by his opinion but be able to accept consensus. The new 
board member must be bringing in some additional skills. The board term is four years 
renewable once, so one can serve for a maximum of 8 years on the board. 
4.1 Objectives and Key Result Areas
The objective of this component as stated in the project agreement is to “Strengthen the Role of 
the Board of Directors through Workshops and Exposure Visits”. It was anticipated that the key result 
by the end of the project would be “FKL mission and strategy clearly articulated and lived out by the 
Board of Directors and Management Staff”. The vision is stated as “… one nation where all people are 
able to work toward fulfilling their dreams and potential for the future and have the dignity of being able to 
provide for their own needs and the needs of others”, while the mission of Faulu is stated as “… to be a 
leading provider of financial services to further holistic nation building and maximise shareholder value.” The 
strategies adopted by Faulu to achieve its vision and mission include moving from operating as 
an NGO to a fully commercialised microfinance company operating country wide. In order to 
achieve the key result, some immediate objectives laid out included to:
ß Prepare the Board of Directors to provide better governance
ß Prepare the managers (and other staff) to operate in a private commercial
institution.
4.2 Progress achieved against objectives
Workshops for enhancing governance
It was found out that Faulu Board of Directors are well trained in corporate governance and 
are informed on matters relating to microfinance. All the members of the board except the 
newest member have undergone training in corporate governance. The training courses were 
spread out such that not all the directors attended the courses at the same time. Two members 
attended the training course in October 2001, one in October 2002, one in December 2002 
and another one in March 2003 (five members of the board). Although the newest board 
member has not undergone the corporate governance training, it is the FKL Board policy that 
all board members must undergo corporate governance training at the Centre for Corporate 
20
Governance and be Certified Directors of the Institute of Directors, Kenya. The new director 
will therefore get a chance to be trained at the Centre. The formal corporate governance 
training courses were all conducted by the Centre for Corporate Governance. 
Workshop for visioning
It was established that Faulu board members have a clear vision of where Faulu should be in 
the long-run. It was established that the Faulu Board of Directors goes for retreats every year. 
As a way of enhancing its corporate governance, competence and capabilities, the Board has a 
policy of using these retreats both as training forums and as forums to strategise for the way 
forward. During such retreats, therefore, guest speakers or facilitators have been invited to 
facilitate on corporate governance or board decision-making process. At the annual retreat of 
August 2001, a leading corporate manager in Kenya, Mr. Titus Naikuni (Managing Director, 
Kenya Airways) was the guest speaker/facilitator. 
In the year 2003 Faulu turned 10 years old. To mark the anniversary, the board had a special 
team building retreat dabbed “Blue Sky Session”. The idea was that each director was 
supposed to look at the sky and dream about the future of Faulu and share his or her dreams 
with the rest of the directors. This led to the formation of the strategy for the next five years. 
It was emphasised that such sessions were used to sharpen the Faulu Vision/Mission but not 
to change them. 
Board of directors’ handbook
The board has developed a Board of Director’s Manual as was anticipated at the beginning of 
the project. The manual has chapters on Faulu as a company; the purpose and responsibilities 
of the board; board members’ functions; structure, systems and style; training, development 
and compensation and relationship. Under relationships such subjects as board members’ 
relationship with the chairman and amongst themselves, relationship with the General
Manager, management and staff among other topics have been discussed. Under systems, the 
following issues have been discussed: board meetings, frequency of board meetings, board 
meeting agenda, board information and decision-making. 
The evaluation team was informed that the Centre for Good Governance had a look at the 
handbook and gave some useful comments that helped improve the document. This
document is a great idea and puts Faulu ahead of other companies, as many companies in 
Kenya do not have directors’ handbooks. 
4.3 Efficiency of implementation 
To measure efficiency of an implementation process, one needs to compare plans and 
achievements, and whether the implementation of activities was timely or delayed. The 
evaluation team was not able to find any quarterly plans for the board and staff. Likewise there 
were no narrative reports describing the implementation progress. There were only financial 
reports to USAID. This made it difficult to measure efficiency in the implementation of 
activities. 
21
4.4 Effectiveness of the implementation 
The effectiveness of board training can be gauged by the manner in which the board conducts 
its affairs now as opposed to manner in which its business before. During the evaluation, the 
team saw signs of improved efficiency in the manner the board conducted its affairs. The 
board recently set up committees: Executive Committee, Risk Management Committee and 
Internal Audit Committee. These committees are accorded specific tasks and they report to 
the board during their meetings. 
It was also found out that board members go to meetings more prepared. This is because they 
have realised that to participate effective in board meetings, they have to take time and read 
board papers before board meetings. The meetings are characterised by informed discussions, 
are professional, brief and to the point.
22
5 Leadership and Staff Development 
5.1 Objectives/Key Result Areas
The objective of sub-component was to develop human resource through training and 
exposure visits for management and credit officers.
5.2 Planned Activities 
The following activities were planned to achieve the objective:
ß Develop staff training curriculum
ß Undertake in-house staff training 
ß Staff study visits to MFIs in Asia, Latin America and Africa
ß Staff external training in Boulder/Frankfurt
ß Increase the proportion of productive operational staff from 40% to 70% by December 
2001
ß Conduct staff motivation survey
5.3 Progress achieved against objectives
Develop Staff Training Programme 
The project proposal indicated that staff training curriculum would be developed, however, it 
was explained that was to be developed was a training programme and not curriculum. The 
Human Resources Department prepared a training calendar for the year 2001. The
programme was quite detailed and indicated the name of the course and when it would be 
offered, and in some sections, how much it would cost.
There were however no similar training programme for the years 2002 and 2003. The 
explanation given for this is that there had been a rapid growth in the portfolio and there was 
a shift of focus from training to loan repayment monitoring. 
Undertake In-house Staff Training
Several training courses were conducted where all the staff participated during the project 
period. Such training included induction training for new staff that covered topics on group 
dynamics, business training and loan policies and procedures, Customer Care, Default
Management. Generally these areas are critical for the operation of MFIs. All new staff must 
undergo training in these.
Conduct Study Visits to MFIs in Asia, Latin America and (other countries) in Africa
During the life of the Faulu Capacity Building project, the CEO and the Chairman of the 
Board of Directors made a study visit to Washington DC as guests of the World Bank. One of 
23
the newer members of the board accompanied staff for an exposure visit to Bangladesh. While 
in Bangladesh, the Faulu team visited the leading Asian MFIs like BRAC, Grameen Bank, 
ASA and Buro Tangail. They noted that whereas Grameen was focused on microfinance 
lending, BRAC had a more holistic approach and had other programmes like in health. BRAC 
even runs a University. One major lesson learnt from ASA was the importance of keeping 
operations simple and standardized and therefore the need to encourage and ensure that staff 
adheres to operations manuals and guidelines. Other ideas that were reinforced were (a) the 
need to cap client loads for DFOs; (b) market segmentation for right product delivery; and (c) 
care in replication as poverty levels as contexts differ.
Conduct External Staff Training in Boulder/Frankfurt
The Microfinance Summer Academy Course conducted in Boulder/Frankfurt, Germany is a 
two-week microfinance course offered during summer of every year. The institution offering 
the course is part of the Deutschbank College. It is an international course attended by people 
from many different parts of the world and facilitated by prominent personalities from 
microfinance sector. Since 2001, two members of FKL staff have attended the course; one in 
2001 and another one in 2002. Some of the topics covered in this course include:
Staff talked to felt this was a great course that made one see the “big picture” of microfinance 
industry. The course also exposed and removed the participants from their cocoons making 
them realise that what they do is not necessarily the best. 
Increase the proportion of productive operational staff from the current 40% to 70% by December 2001. 
According to the information received from Human Resource Department, at the time of the 
evaluation, Faulu had a 114 strong staff out of which 30 were Business Support Centre staff 
members while 84 were field staff. This means that 74% of the work force was field staff. This 
means that the restructuring recently carried helped Faulu achieve the objective of raising 
proportion of field staff to above 70%.
Conduct Staff Motivational Survey
A survey as is conventionally known was not carried out, however staff members were asked 
to write unsigned letters to the management raising what ever issues they thought needed to 
be addressed. Staff responded well and a meeting to discuss the emerging issues was called. 
After the meeting, it was felt that all the contentious issues were adequately addressed thereby 
raising staff morale. 
· How to manage microfinance institutions 
· Leading changes in microfinance market
· Product development
· Cost management
· Risk management, among other topics 
24
5.4 Effectiveness of implementation
The purpose for human resource development was to, among other things; prepare the 
management and other staff members to operate in a private commercial institution. This 
meant not just acquiring technical skills to function, but also changing the thinking of staff 
from welfare/relief type of operation. MFIs with NGO background have found this a big 
challenge as staff members tend to continue to have a non-profit attitude. 
Study visits to successful MFIs in other continents were found to be a major eye opener to 
staff. Some of the staff talked to were shocked at the level of poverty in these places and were 
equally very surprised that people can do so much, on their own about their own poverty and 
therefore the determination that “we (Faulu) can also do it”. The visits also made the staff 
realise that serving the poor in a profitable way is not just a Faulu talk but something being 
done successfully in other continents with even higher level of poverty.
External training, especially in internationally recognised institutions like the Frankfurt
Summerakademie was found to be effective in making staff see the bigger picture of the 
microfinance industry. It had the effect of making staff see where Faulu is vis-à-vis the other 
MFIs in the world. 
These activities were found to have contributed to changing staff thinking and attitude.
5.5 Efficiency of implementation
The external training, the study visits and other staff training were planned for carried out 
according to plan. The study visit to Bangladesh had representation from all cadres of human 
resources; DFOs, middle management, senior management and even one board member. This 
is very commendable as doubles up as a team building activity. This was therefore found to 
be an efficient use of resources.
5.6 Recommendations
Board of Directors’ Manual:
It is commendable that this document is place in Faulu, however, it the experience of the 
consultant that many times such documents are produced and then kept in the shelves. To 
avoid this, it is recommended that the board considers reviewing the manual as a permanent agenda item for 
the annual board retreats. This would serve two purposes: one, it would ensure that all board 
members are continuously up to date with the expected performance of each board member, 
two, it would ensure that the document “stays alive” as the document would be reviewed 
continuously.
25
Documentation:
It is recommended that Faulu improve in its documentation. When seeking to know the training courses 
attended by the board, there were no records apart from the financial records. Information 
had to be extracted from payment records. Likewise, there were no training reports. It is 
common practice in many organisations that where a training course has been conducted, a 
training report is produced. Such a report would contain information on when the training 
was conducted, where it was conducted, who participated, the highlights of the course 
contents, training evaluation by participants or beneficiaries and how the training progressed 
generally. Because such reports contain course outlines and evaluation reports the participants, 
they would help Human Resources Department design future training courses to offer to staff 
in future. 
There is a need to document “Back to Office” reports after cross visits and make them 
available to other members of the board and/or staff of the institution.
Progress reports
Then evaluation team was not able to trace any reports detailing project implementation 
progress reports. This an import monitoring tool. It is recommended that financial reports be 
accompanied with a narrative showing the implementation progress, problems encountered and how they were 
overcome and any lessons learned. 
Exposure Visits
It is recommended that local (within Kenya) exposure visits should also be undertaken as this 
can be very cost effective. There are many aspects of microfinance practices that Kenyan MFI 
can learn from each other. 
26
6 Product and Strategy Development
6.1 Objectives/Key Result Areas
The objectives of this component were: (a) develop growth and market penetration strategies for 
existing and new markets; (b) carry out active research on indigenous systems for micro-lending and savings; 
and (c) Develop new products and services. (The key result of this component was expected to be 
“FKL systems established to effectively and efficiently achieve the mission and strategic goals of the company”. 
This key result area would support the achievement of the following strategic objectives of 
FKL:
ß To expand Faulu Kenya into an effective multi-unit, financial services intermediary, able to 
provide financial services to micro and small enterprises (MSEs) on cost covering, 
sustainable and profit basis;
ß To increase both agricultural and non-agricultural employment and self employment 
opportunities, especially for low-income people, through increased productive capacity; 
and 
ß To provide increased access to financial services for low-income people in Kenya, who are 
disenfranchised from mainstream commercial banking and financial sector.
6.2 Planned Activities
Under product development strategy, Faulu planned to carry out the following activities
(a) Develop appropriate tools for carrying out the assessments and the training of staff in the 
analysis of findings, and carry out market mapping in existing and new markets (c) research its 
client profiles (c) develop product and services development toolkit (b) set up research and 
product development department (d) carry out active research on indigenous systems for 
microfinance lending and savings (e) develop growth and market penetration strategies for 
existing and new markets (f) develop a system of client progression within Faulu (f) carry out 
full costing of products and services 
6.3 Achievements against objectives
Develop growth and market penetration strategies for existing and new markets
Faulu Kenya was able to develop growth and market penetration strategies for its existing and 
new markets through various activities that included a socio-economic survey to understand 
client profiles, research on dropouts to understand underlying factors for dropping out, 
market research to understand current and potential customer needs, research to profile and 
understand Faulu’s competitors, and customer survey to understand customer satisfaction. 
The socio-economic survey was undertaken by staff of Marketing Department in December 
2001. Its main objective was to bring out client characteristics which would enable Faulu to 
27
develop market segmentation strategies for product positioning. The survey covered 8,581 
clients (made up of 46% women and 54% men) from the 5 business units and provided client 
profiles by gender, locality, business sector, socio-economic class, loan cycle, level of 
education and loan type. Faulu staff also undertook research of Faulu dropouts to find out 
and track information on why clients were leaving the programme and what they think about 
the programme. Results from the dropout study revealed issues related programme design, 
client personal and business reasons, group related reasons and product methodology. The 
findings of both studies were documented and used to streamline specific needs for clients 
during the development of new products. 
Faulu has developed in-house capacity to carry out market mapping through Area Market 
Mapping (AMA). This tool was developed and refined by Faulu and has been useful for 
obtaining strategic information for penetrating existing or completely new operational
territories. The tool is used analysing market-mapping exercise carried out by DFOs as part of 
the market entry activities. Using the tool, DFOs can analyse information and reasons as to 
the most potential area and groups for expanding market; and priorities that should be set for 
different types of groups. The tool is now part of the Loan Policy and Procedures Manual. 
The tool has various steps a DFO should take to gather market information on competitors 
and local and social dynamics. 
Develop new products and services
According to the proposal for the Grant, FKL was to develop, test and launch two new loan products 
within the grant period. However, the product development consultancy undertaken by Fineline 
Systems and Management Ltd in collaboration with a team from FKL in 2001 developed 
eleven prototypes. Among these products was the refined working capital loan which had 
been very popular with micro/small-scale entrepreneurs and considered the company’s 
flagship. FKL branded and rolled out five products: three business loans and two consumer 
loans briefly described below.
Pamoja is the basic business loan for working capital for first-time micro and small-scale 
business clients previously without experience with formal financial services. Pamoja loans 
starts from Kshs1000 and capped at KShs100,000 and repayable over 12 months. Fanaka is 
also a working capital loan for existing clients who have successfully serviced at least two8
Pamoja loans and wish to take a third or subsequent repeat loan of Kshs 100,001 – Kshs 
500,000. Fanaka loans were repayable over 18 months. Fanaka Plus is a loan product for 
relatively bigger growth businesses which enabled the “Jua Kali” enterprises excluded from 
 
8
 Although Fanaka Loans and Fanaka plus Loans were meant to be for graduated Pamoja groups these loans 
are now all business loans for clients that meet the conditions and requirements for Faulu Kenya.
28
financial services by both microfinance and mainstream financial institutions to access credit 
in smaller self-selected groups. Fanaka plus loans start at Kshs 500,001 and caps at Kshs 
1,000,000 and is repayable over 24 months. Elimisha loans is a school or college fees loan with 
a maximum of Kshs 50,000 repayable over 12 months while Mara Moja is an instant 6-month 
loan for emergencies, also capped at KShs 50,000. Loan terms and conditions are given in 
Table 
Table 5.1: Loan terms and conditions
ATTRIBUTE PAMOJA FANAKA FANAKA PLUS ELIMISHA MARA MOJA
LOAN SIZE 
RANGE 
1-100,000 100,001-500,000 500,0001-1,000,000 Kshs 1-50,000 Kshs 1-50,000
INTEREST RATE 18% reducing to 
16% and to 15% 
upon achieving 
perfect repayment 
rates
18% reducing to 
16% and to 15% 
upon achieving 
perfect 
repayment rates
18% reducing to 
16% and to 15% 
upon achieving 
perfect repayment 
rates
2% flat rate per 
month
2% flat rate per 
month
LOAN TERM 3,6,9,12 …….15,18 …………21, 24 3,6,9,12 months 3,6 months
GRACE PERIOD 2 or 4 weeks 2 or 4 weeks 2 or 4 weeks 2 or 4 weeks 2 or 4 weeks
REPAYMENT 
OPTIONS
Weekly,
2 weekly, 4 weekly
Weekly, 
2 weekly, 
4 weekly
Weekly, 2 weekly, 
4 weekly
Weekly, 
2 weekly,
 4 weekly
Weekly, 
2 weekly, 
4 weekly
LOAN 
PROCESSING 
PERIOD 
10 working days 10 working days 10 working days 10 working days 5 working days 
from 
Collateral Group Guarantee
non-traditional 
assets like 
household and 
business
Group Guarantee
Moveable and 
fixed assets (e.g. 
land, motor 
vehicle and 
company shares) 
Group Guarantee 
Moveable and 
fixed assets (e.g. 
land, motor vehicle 
and company 
shares) 
Business/Industrial 
Embodied in the management of business loans was a client progression system where clients 
could start with relatively small amounts and graduate to bigger loans. This ensures that loan 
terms are matched to client needs and desires.
The pricing of new products i.e. interest rate setting was done after a full costing exercise that 
was preceded by a review of Faulu’s service delivery system, the estimation of level of 
efficiency and analysis of cost per service. The costing exercise included an analysis of 
overhead costs and those related to implementation, disbursement and monitoring of
solidarity group activities. The areas of high expenditures were revealed and highlighted for 
29
action. The costs at the time of product offer reflected the true value of the products and 
associated costs.
 Research on indigenous systems for micro-lending and savings
Research on indigenous systems for micro lending and savings was done as part of the 
product development exercise. As a result, a loan product for financial cooperatives and 
associations branded Ushirika was developed and will be tested at an appropriate time. 
6.4 Effectiveness of project implementation mechanisms
The effectiveness of a project can be gauged in relation to the contribution made by results to 
the achievement of the project purpose, and how the assumptions have affected project 
achievements. Effectiveness is also gauged by the utilization of resources to achieve the 
results. It is usually assumed that the contributions of projects are thought of in advance 
before the start of the project.
Markets and Products
Over the past three years, Faulu Kenya Limited has built up a strong market position in 12 
business hubs (Central Nairobi, East Nairobi, West Nairobi, Ngong Road, Jogoo Road, Thika, 
Pumwani, Machakos, Nyeri, Meru, Nakuru, and Molo). It is a market leader in microfinance 
reaching over 20,000 clients and whose wide range of products meets a variety of needs of its 
original target group who are the economically active poor persons unable to access bank loans.
Utilization of resources
The product development exercise involved not only contracted consultants but also an 
internal team from different parts of the organization representing their departments. The 
team was composed of personnel from marketing department, finance, information
technology, operations, human resource and branch representatives and field officers. The use 
of internal staff as part of the team during the market intelligence and customer survey, 
prototype development, and launching of the new products enabled Faulu to build in a strong 
in-house capacity for product development or refinement. Faulu is now able to respond 
adequately to client needs through its activities in the Marketing and Business Services 
Development Department.
6.5 Efficiency of project implementation mechanisms 
The efficiency of a project is gauged by whether the results were obtained at reasonable costs, 
how well the means and activities were converted into results and the quality of results 
achieved. 
30
Under the component of research and development, the implementation of the project 
mechanisms could be said to have been efficient. This is because: (i) most of the original work 
plans starting from the assessment and analysis of Faulu Kenya market and clients, and 
product and strategy development were complied with and at times, the institution surpassed 
its targets. For example, according to the proposal, 5 loan products were developed and rolled 
out instead of 2 new loan products. (ii) Costs through which the component was done were 
reasonable. The estimated person days of complex product development9
 using MicroSave￾Africa qualitative research tools is 104 days at an estimated cost of USD37,000. FKL used 
USD39,44310, which is 83.2% of the budgeted amount. The cost of this exercise is therefore 
in line with industry-wide costs for product development. The various activities carried out 
for the Research and Development component were relevant and the resources used were 
adequate for the activities. 
The process of carrying out the product development activities were professional and
adequate as they led to the launching of 5 new/refined products which has enabled FKL to 
grow tremendously within the Grant period. The consultancy, through which the activities 
were carried out, was awarded to Fineline Systems and Management Limited, a consultancy 
firm specialised in providing strategic advice, technical assistance, and training to institutions 
involved in microfinance and small enterprise development whose in-house staff and
associates have the accreditation from MicroSave Africa and the expertise to undertake this 
activity. 
 
9
 Graham A.N. Wright “Market Research and Client-Responsive Product Development” pp 11
10 For customer and market intelligence survey of the Kenyan Microfinance sector, training and discussion workshops 
between the consultants and Faulu Kenya, review of FKL service delivery systems and costing per service, design and 
development of product prototypes, revising policies and procedures manual, developing marketing market positioning 
strategies, reviewing of lending operations and costing and pricing of new products.
31
7 Service Delivery 
7.1 Key Result Area
As stated in the results framework, the key result of this sub-component is “FKL systems 
established to effectively and efficiently achieve the mission and strategic goals of the 
company.
7.2 Objective
The objective of this sub-component was to strengthen lending operations and procedures.
7.3 Planned Activities
Faulu planned to (a) re-allocation of some of its business units (b) review basic lending 
operations to speed up its operations e.g. loan approval and disbursement.
7.4 Achievement against objectives
Re-allocation of business units
Discussions on re-allocation of business units in Faulu would not be complete without 
discussing in what institutional structure Faulu launched the five products and what were the 
challenges and effects of growth. 
Before New Product Development (2000-May 2002)
Faulu’s structure before the launch of the new products was more appropriate for a growing 
organization. The structure was responsive both to clients and employees and could allow 
Faulu to learn the needs of the clients and respond to them. It was a flat structure where the 
customer, markets and customer services personnel were the central focus for all their 
activities and the rest of the functions served the core business. The strategic business team, 
composed of the Chief Executive Officer, Business Unit managers, Operations Manager, 
Finance Manager and Marketing Manager were constituted to give business direction and 
support to business units (branches). This structure was appropriate as it tended to minimize 
walls of communication and encouraged the participation of staff across boundaries of 
departments. 
Faulu’s organization systems and resources including human resource, management capability 
to serve the market well, policies and procedures could only serve adequately, its current 
clientele. It had a one main product which was also the flagship of the organization – the 
Working Capital Loan financing needs for working and expansion capital of micro/small-scale 
enterprises and two other products (Family Need Loan and the Fixed Asset Loan) which had 
performed poorly in the market due to certain factors. The available strong staff of 110, 64 of 
who were Development Finance Officers could easily cope with the workload and client 
demands.
32
Even before the launch of the new products, Faulu had planned to re-allocate its business 
units to localities that are customer friendly and to decentralize its basic lending operations to 
speed the response to customer needs/complaints. This decentralization would pose major 
administrative challenges to Faulu in ensuring that the institution is not over duly exposed to 
portfolio deterioration and standard processes are implemented consistently in all the
branches (hubs). 
Fast Growth and Expansion (May 2002 – July 2003)
When Faulu rolled out the five products in May 2002 and many existing clients took up 
multiple loans that strained their business beyond their capacity to pay. Many new borrowers 
were recruited as well leading to additional clients leading to the rapid increase in the 
outstanding portfolio by the end of 2002. The increase in clients caused a heavy strain on the 
internal system which compromised the ability to supervise, to monitor loans and manage 
risks. The results are discussed below:
a. Deterioration of Portfolio Quality
FKL portfolio quality deteriorated to an all-time low of 19.36% in 2003 from manageable 
levels in 2001/2002. Similarly, the effective repayment rate (ERR) reduced by nearly half from 
80% in 2002 to 43% in 2003.
Table 6.1: Portfolio Quality (1999-2003)
1999 2000 2001 2002 2003
Outstanding Loan Portfolio 
(Kshs ‘000) 167,340 245,126 321,872 709,529 545,935
Portfolio at Risk (PaR28) 5.93% 7.91% 6.07% 7.9% 19.36%
Figure 2: Portfolio Quality (1999 – 2003)
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
1999 2000 2001 2002 2003
0
5
10
15
20
25
Outstanding Loan
Portfolio
Portforlio at Risk
33
Figure 3: Portfolio quality (1999 – 2003)
Effective Repayment Rate
0
20
40
60
80
100
1999 2000 2001 2002 2003
Effective Repayment Rate
The increasing levels of portfolio at risk and the decreasing effective repayment rates showed 
that the rate of expansion exceeded the management’s ability to serve the market well, either 
in managing risks or in supervising field staff. 
b. High levels of client exit
Faulu lost one fifth of its clients in 2002 and one-third in 2003 nearly one and half years after 
introducing new products. This was not healthy for Faulu as this drains resources and may 
lead to weaker groups that could easily disintegrate for lack of cohesion. These very high levels 
of exit could be attributed to but not exclusive to either a dissatisfaction of clients with FKL 
and dissatisfaction with product offer.
Table 6.2: Client Exit in Faulu (1999-2003)
1999 2000 2001 2002 2003
Number of registered clients 10,867 14,965 18,696 24,010 20,804
Percentage of clients exiting the 
programme 23% 18% 17% 18% 30%
34
0
5000
10000
15000
20000
25000
30000
1999 2000 2001 2002 2003
0
5
10
15
20
25
30
35
Number of registered
clients
Percentage of clients
exiting the
programme
Figure 4: Client Exit in Faulu (1999-2003)
c. Cost of lending increased
The cost of lending increased between 2002 and 2003 possibly due to the high number of new 
borrowers in the portfolio who had smaller loans leading to decrease in per unit return or 
average cost per shilling.
Table 6.3: Cost of loan made and shilling lent (1999 – 2003)
1999 2000 2001 2002 2003
Cost per loan made 7434 6023 5499 5146 9303
Cost per unit of money lent 0.2 0.16 0.14 0.09 0.14
Figure 5 Cost of loans made and shilling lent (1999 – 2003)
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1999 2000 2001 2002 2003
0
0.05
0.1
0.15
0.2
0.25
Cost per loan made
Cost per unit of
money lent
35
Organization Restructuring (July 2003 – Present)
Re-allocation of Business units was undertaken in June 2003 as part of the restructuring 
process. Faulu had experienced growth with the same flat organization structure and same 
number of staff. It had become difficult for operations to supervise DFOs, to motivate staff, 
to achieve optimal loan collection. 
At the beginning of reallocation, Faulu had 5 branches (or hubs) as follows: Nairobi Central, 
Nairobi East, Mt. Kenya, Nairobi West and 5th Business Unit managed by Branch Managers. 
A sixth business unit was later created. The Operations Manager supervised the branches 
managers (now Team Leaders) who also supervised 17-19 DFOs. The 6 branches were re￾allocated to 12 business units (hubs) as follows: Central Nairobi, Jogoo Rd, Pumwani, East 
Nairobi, Thika; Mt Kenya; West Nairobi, Ngong Rd; Nakuru, Meru, Machakos and Molo. 
Positions of two Area Managers were created to oversee the hubs and report to the
Operations Manager. Area Manager 1 is in charge of Central Nairobi, Jogoo Rd, Pumwani, 
East Nairobi and Thika while Area Manager 2 is in charge of West Nairobi, Ngong Road, 
Nakuru, Meru, Machakos and Molo (sub-hub). Each hub is headed by a Team Leader who is 
in charge of 5-7DFOs. The structure is given in Fig. 6. 
Fig.6 The decentralized operations structure
One objective of the re-allocation of business units was to create an organizational structure 
that is more responsive both to clients and staff. In the new structure, the operations manager 
Operations Manager
Area 
Manager
Area 
Manager
B
U
B
U
B
U
B
U
B
U
B
U
Every Business Unit is in charge 
of 5-8DFOs
BUs are headed by 
Team Leaders
36
supervises two area managers instead of 5 branch managers a factor that now ensures better 
supervision; a lot of administrative responsibilities such as budgeting and planning that was 
previously the responsibility of the branch managers have now been removed and given to the 
Area Managers. The branch managers now work with smaller teams of 5-8 DFOs instead of 
17 DFOs. All these measures have enabled the branch managers to focus on supporting field 
staff and follow-up of bad debts. 
One of the results of the re-allocation of business units is that Faulu has been able to reduce 
its cheque clearing process from 20+ days to 10 working days from the time of loan approval. 
This is still set to reduce considerably to 5 working days when the current project of Business 
Process Improvement (BPI) is finalized, as client forms will be posted online from the hubs.
Review basic lending operations and other changes
The restructuring of the business units was accompanied by several institutional measures to 
ensure that the organization growth is contained and managed. These measures included 
standardization of credit management procedures and ensuring compliance by the internal 
audit system. Standardization of operational procedures has been institutionalized in the Loans 
Policy and Procedures Manual. Faulu frequently observes the changes in its marketing 
environment and responds adequately. Some of these changes have been institutionalised in 
documents such as the Operations Charter, Policies Brochure, Products Fact Sheet, Collateral 
Policy and Interest Rate Changes. The Operations Charter encompasses a new set of risk 
management tools such as Tolerance Limits for Default, which has an in-built incentive 
system for DFOs. 
The loan delivery mechanism used by Faulu Kenya is based on (a) individuals financed 
through joint liability groups of 15 – 30 members (b) weekly meetings by clients, (c) adequate 
training first in six day loan orientation seminars (d) 8-week “savings” first (e) repeat loans 
with client-progression policies, (f) five loan products offered (g) LSF of 25%, and (g) gender 
orientation. Faulu has reviewed its basic lending operations to balance its own needs for 
efficiency and productivity and customer needs for good services. It has reviewed its target 
market, collateral policy, client incentive system, loan officer incentive systems and interest 
rate structure.
Redefinition of target Market:
In practice, Faulu’s clients are primarily micro and small-scale entrepreneurs engaged in 
commercial activities of retail nature with a reasonable number engaged in businesses, 
agriculture and manufacturing. Clients can access three types of business loans and two types 
of consumer loans as shown in Table 6 below.
37
Table 6.4 Product/Market Combinations
First time Micro 
and SMEs 
Existing Clients 
graduating from 
Pamoja Loans
Larger Jua Kali 
Businesses
Consumer Loans
Pamoja ¸
Fanaka ¸
Fanaka Plus ¸
Elimisha ¸
Mara Moja ¸
Previously, Faulu served Fanaka groups with 5-7 members. The new policy on group size is 
that all new groups must now have a minimum of 15 members and a maximum of 60 
members. Existing groups of less than 15 continue receiving loans but have to add more 
members by June 2004. This change has been made to emphasise services to the economically 
active poor11 segment of the market, the original target group of Faulu, which is also 86% of 
its business. Faulu’s focus is now on those requiring loans of Kshs. 100,000 and under. 
According to the Field Operations Charter, no first loan will exceed KShs100,000 and groups 
of less than 15 people will not be recruited
Assessment for loan sizes is being enhanced to incorporate both client and business the ability 
to repay the loan as opposed to using only business ability as the focus. This change has been 
instituted to enable DFOs make a decision to scale down the loan requested or vary the loan 
period. As a cautionary measure to DFOs, loans sizes now cannot exceed twice the previous 
highest loan. Faulu has also proposed that a client cannot have more than two loans at any 
time – and these loans have to be either Business Loan and Mara Moja or Business Loan and 
Elimisha. To guard on clients taking more loans than their businesses can manage, consumer 
loans are given when 50% of the face value of current loans have been repaid.
New incentive system for DFOs
Faulu has instituted a new incentive system for DFOs interlinked with their ability to manage 
their portfolios. The system is based on the achievement of an effective repayment rate of 
(90%), loan capacity (80%), maximum number of groups (30) and minimum number of clients 
per DFO of 360 clients. Improvement on each minimum is rewarded at different levels with 
the top most reward evaluated on the ideal case of 600 clients, 100% loan capacity, 100% 
effective repayment rate and not more than 30 groups. Rewards include cash awards and 
bonuses based on individual pay scales. 
 
11EAP is a person, running a small business, unable to access commercial bank loans and only able to handle a loan of less 
than Kshs. 1 million
38
Repayment Incentives for Clients and Interest Rate Reduction
Due to several changes that have taken place in the financial sector regarding interest rates12
and the pressure to reduce interest rates by clients, Faulu lowered the interest rates for all 
business loans as follows: 
F Pamoja (22%) – a straight 18%;
F Fanaka and Fanaka Plus (20%) – a straight 18%;
F Mara Moja (3%) and Elimisha (4%) – a straight 2%.
At the same time, an incentive system has been created to reward clients with good repayment 
records. Clients, who pay their first loan (18% interest) with a 100% repayment record, take 
their second loan at 16%. If they pay this back again at 100% record, they take their third loan 
at 15%. They can then choose to stay at 15%, while Faulu considers a lower rate in future for 
those who will maintain the 15% for more than 10 loans. If during the loan period they fall 
into arrears, they will be allowed to finish repaying this loan at a lower rate, but their 
subsequent loan goes back to the 18% level and starts all over again.
7.5 Effectiveness of project implementation mechanisms
The effectiveness implementation mechanisms can be gauged by looking at the benefits of the 
projects and whether the outputs have contributed to the achievement of those benefits, and 
the unforeseen outcomes and reasons for difference. 
Faulu did not anticipate the extent to which very fast growth would constrain the delivery 
system. Faulu needed to ensure that organization systems are in place to cope with increased 
administrative burdens that accompany more staff and more clients. Thee procedures should 
have been sufficiently tested to ensure that the staff does not make any mistakes and the 
operating systems should have been ready to support growth. The main challenge became the 
timing of all the events to ensure that all systems-go before the launching of the new products. 
This turn of events affected the outcome in terms of portfolio quality, client exit, and 
repayment rates. As a result, Faulu had to undertake a major restructuring of operations to 
make delivery efficient. 
The restructuring led to greater benefits for Faulu. Response to customer needs and wants is 
faster with the implementation of “Tuongee Forums” and suggestion boxes and the
relationship between Faulu Kenya and its clients has considerably improved. Customers are 
 
12 The interest rates on government paper which is often used as a benchmark for setting interest rates in the market have 
rapidly reduced to minimal rates in the one year, with the current rate at an all time low of 1.5% for the 91 days T/ Bill. 
Traditionally, the rates have been high, giving higher yields than most investments. Commercial banks are increasingly 
coming under pressure from the government to direct funds to the real sector instead of to treasuries and additional 
disclosure requirements for commercial banks have been introduced requiring disclosure of highest lending rates and lowest 
savings rates in the local diaries 
39
considerably more “settled” as opposed to early 2003 when customers felt that Faulu did not 
listen to them13. “Tuongee forums are regularly implemented and 1993 alone, over ten (10) 
such forums were held with clients to explain and re-enforce Faulu’s policies and maintain 
good will and discuss with clients what clients want or do not want. For example, as a result 
of the demands from clients to lower interest rates in 2003, Faulu responded by offering its 
clients an incentive for good repayment and clients pay between 18% and 15% . 
Faulu Kenya has clear defined lending policies detailed in the Loan Policy and Procedures 
Manual which is regularly revised to take into consideration discussions and changes that take 
place at customer level, especially those issues gathered during the “Tuongee Forums”, from 
customer complaint boxes and changes in the wider environment such as issues of interest 
rates and collateral policies. The lending policies are in line with microfinance sound practices 
in areas of loan processing and approval and default management. The new loans and 
procedures manual is very comprehensive with sections on portfolio management and
reporting and other sections on how to carry out area mapping and analysis, loan assessment, 
credit risk assessment etc. 
The incentive system is clear and well documented and DFOs know the rewards and penalties. 
FKL’s incentive system is based 
As of this year, loan delivery is very fast and has reduced from the former 20+ days to only 10 
working days and is set to reduce even to 5 working days with time. As a result of the activity￾based costing consultancy and the subsequent costing of products, Faulu Kenya initially 
managed to reduce wastages, and the cost per shilling lent was at its lowest in 2002 but 
suddenly increased in 2003 – an area where Faulu needs to refocus. 
Faulu’s interest rates are quite competitive and are in line with what the other major MFIs in 
the Kenyan Financial sector are charging. For example, for loans of less than 100,000 the 
major MFIs are charging 18-24% while commercial banks are charging between 14%-23% and 
Faulu charges has reduced from 22% to 18% and even goes down to 15% with good 
repayment records. The loan terms and conditions are given in Table 4.6.
Faulu partners from USAID have ascertained that the project implementation was very 
effective and the funds were well spent. During the implementation period, reporting was 
done according to the contractual agreement or fully discussed between the partner and the 
Chief Executive Officer of Faulu in crucial meetings or through written communications. 
 
13 Customer Satisfaction Survey Report by Fineline Systems and Management Ltd, September 1993
40
7.6 Efficiency 
The efficiency of a project is gauged by whether the results were obtained at reasonable costs, 
how well the means and activities were converted into results and the quality of results 
achieved. Even though Faulu Kenya had to incorporate a lot of activities to strengthen the 
operational procedures, the activities implemented were consistent and adequate for achieving 
the planned outputs. 
7.7 Recommendations
Issues identified Implications Recommended actions for Faulu
Worsening of
Portfolio Quality
Loan portfolio is the largest asset that Faulu 
has and therefore when the portfolio quality 
worsens e.g. in this case a PaR over 30 days of 
19.3%, it should be a matter of great concern 
to Faulu as the risk of not being paid is very 
high. The benchmark for MFIs is usually 
<10% since most loans are not backed by
bankable collateral.
Understand reasons for worsening Portfolio at 
Risk and declining effective repayment rates and 
resolve them. Start with processing information 
from “Tuongee” forums and Suggestion boxes 
to understand new client demands and the
nature of that demand. 
High levels of
Client Exit 
A great deal of Faulu’s resources is being
drained in new recruitments, orientation and 
loan assessments.
The remaining groups would be weaker groups 
that could easily disintegrate due to the
absence of the values that held them together. 
Carry out a market research on client perception 
to find out reasons why Faulu lost 30% of their 
clients in 2003.
The Challenges of
Growth
Staff could be overwhelmed by the number
and complexity of activities that took place
within the Grant period including the
measures undertaken to control the challenges 
of growth.
Faulu should now consolidate the gains from 
the institution capacity building programme. A 
lot of systems are on the ground. There is a 
need to ensure that the internal systems work 
before implementing completely new
programmes. Any programmes now
implemented should strengthen the existing
systems in place.
41
Issues identified Implications Recommended actions for 
USAID
Readiness for
Deposit Taking
Faulu Kenya needs to have relevant infra￾structures in place for deposit taking in 
terms of people, products, processes 
(including MIS), branch networks, and 
support organizations.
Support Faulu to understand the full 
requirements of a deposit taking 
institution e.g. through an institutional 
assessment to enhance institutional 
preparedness for deposit taking.
Support Faulu to develop its staff and 
leadership in preparation for deposit
taking
Broader Challenges
for MFIs e.g. new 
products, new
markets and new
services.
Faulu Kenya and other similar MFIs in 
Kenya face the challenge of moving to the 
next level in terms of better innovative
products that is clearly demand driven. As 
of today, competition is clearly coming 
from commercial banks that have gone
down market and offering services which 
were in the domain of MFIs.
USAID should support MFIs in general 
to understand changes happening in their 
environment. The starting point would 
be to work with the Association of
Microfinance Institutions in Kenya to
collect and disseminate data relevant to 
its members, including Faulu Kenya
USAID could support Faulu to
understand the implication of its pilot
BDS service before roll-out; as it would 
have major implications for internal
resources.
42
8 Management Information Systems 
8.1 Objectives and planned activities
The objective of the MIS component of the USAID Micro-PED grant-funded project was to 
ensure that FKL’s systems are established to effectively and efficiently a chieve the mission and 
strategic goals of the company.
The initial project budget for MIS related activities was US$120,143 (including matching funds 
to be contributed by FKL). These proposed MIS-related projects included:
· Carrying out a systems review to evaluate the adequacy, effectiveness and efficiency of 
the MIS system and recommend strategies for further growth of the organisation 
(budgeted for under the Institutional Analysis heading)
· Replacing the DOS-based loan tracking system (LTS) with modern system, and 
procuring the hardware required to run the new system
· Procure MS Exchange e-mail software and the hardware required to run it.
8.2 Progress achieved against planned activities
The progress received against the proposed activities is as follows:
· The LTS system has been largely implemented, although further work is on-going to 
enhance the reporting functionality of the package
· The software and hardware to run the MS Exchange e-mail system has been purchased 
and installed and the system is operational
· The systems review project grew into a Business Process Improvement project and is 
currently underway
Because FKL overlooked certain USAID procurement rules when contracting the consultancy 
for the BPI project, the Systems Review budget is no longer USAID Micro-PED funded, and 
is now being funded by the company directly.
To take up the slack created by removing the BPI project from the list of USAID Micro-PED 
funded projects, FKL has added the following MIS projects to respond to urgent and
important needs of the organisation:
· Implementation of a Microsoft Great Plains (MGP) financial management system 
· Implementation of PerPay human resources management system.
The MGP project is at inception stage at the time of reporting, whilst the PerPay project is at 
implementation stage. Management has indicated that USAID has approved the reallocation 
of resources to these projects.
43
Management has also provided assurances that although the end of the USAID Micro-PED 
project has come and gone, these on-going projects are not in jeopardy because their 
respective expenditures had been committed and approved before the project cut-off date of 
end of February 2004.
The key components of FKL’s management information systems (MIS) are summarised in 
table 5.1 below, with planned changes in brackets:
Table 5.1: FKL’s MIS software as at March 2004
Software Use
MBWIN Loan tracking
SunSystems (to be replaced by Great Plains Financial Management System) Finance and accounting
InfoPay (to be replaced by the PerPay HR Information System) HR Management 
MicroFin Financial modelling tool
The MIS is based on a Local Area Network (LAN) with client/server architecture at the 
Business Support Centre. Muthaiga and Yaya Area Offices also have LANs, but based on 
client-to-client architecture. The hub offices have standalone personal computers (PCs).
At the core of FKL’s MIS is the MicroBanking System for Windows (MBWIN), a banking 
application software system developed under a joint project of the Food and Agricultural 
Organisation of the United Nations (FAO) and the German Agency for Technical
Cooperation (GTZ). It is a complete banking package that integrates the front-office tellering 
modules (savings, time deposits, current accounts, loan accounts and share account modules) 
and a back-office General Ledge module. The General Ledger module is, however, not used 
by FKL because of its limited functionality.
The MBWIN system is installed on two servers, with five databases representing each of the 
business units (Nairobi Central, Nairobi East, Nairobi West, Mt. Kenya and Business Unit 5).
The regional offices each have a module of MBWIN with no direct link to the Business 
Support Centre system (see diagram below).
44
Source: IT Manager
Other than the Muthaiga and Yaya regional offices that have LANs, the rest of the regional 
installations are on standalone PCs. 
The MIS cycle is driven by Period Transaction Reports (PTR) submitted weekly by the DFOs 
to the head office through their hubs. Data entry is centralised at the BSC Data Processing 
Centre (DPC) and done in weekly cycles. Once the entered data is validated, a client summary 
report (CSR) is sent to the hubs offices in magnetic form, where they can be accessed to 
support decision-making. On a monthly basis monthly management reports (MMR) are 
produced for key operational and executive staff. Monthly trial balances are also produced for 
the finance department to facilitate posting of transaction summaries to the SunSystems 
General Ledger.
Because of the centralised data entry, client information is typically one week old, but given 
that group meetings are held weekly, this cycle is sufficient for FKL’s current needs. This 
Business Support Centre
Muthaiga & Yaya Area Offices
Hubs
LAN
LAN
Standalone PCs
PTR
CSR
CSR
MMR
MMR
Finance
DPC
MBPLA
Business Support Centre
Muthaiga & Yaya Area Offices
Hubs
LAN
LAN
Standalone PCs
PTR
CSR
CSR
MMR
MMR
Finance
DPC
MBPLA
45
could, however, be a constraint if the company’s business model changes to a deposit-taking 
one.
FKL’s management plans to decentralise data entry and to provide on-line, real-time data 
through a countrywide wide area network. The system is to be composed of LANs at each 
site, which are to be interconnected using high-speed digital links to form a secure intranet.
8.3 Efficiency and effectiveness of project implementation mechanisms 
Efficiency is gauged by whether the results were obtained at reasonable costs (financial) and 
how well the means (financial, time, human resources) and activities were converted into 
results.
Effectiveness, on the other hand, can be gauged by the contribution made by the extent of the 
achievement of the project purpose.
In the absence of data on the detailed project plans (including Gantt charts, financial 
breakdown, human resource allocations etc) on which to base our assessment, our review of 
the efficiency of implementation was restricted to a review of the variance between budgeted 
costs and actual costs. The table below shows this comparison:
The table shows that there was a 75% overrun in the budget for MIS related expenditure. A 
75% variance from plan, taken in isolation, would be indicative of both implementation 
inefficiency and ineffectiveness. 
However, the mitigating factors were that implementation of the new financial and human 
resources systems became immediate priorities given the erratic performance of the systems in 
place, which threatened to disrupt the business. This is contrary to the original plan, where 
the project scope would be limited to evaluating options for addressing the MIS issues the 
organisation was facing, and only procuring the systems in later phases of the company’s 
development programme.
USAID 
Funding
FKL Matching 
Funding
Total Funding
Systems review (Included under institutional analysis budget) 11,400 0 11,400 0 (11,400)
Loan tracking system - hardware, software and training 101,971 6,772 108,743 125,182 16,439
Human resources MIS (PerPay) 0 0 0 20,308 20,308
Financial accounting system (Great Plains) 0 0 0 51,422 51,422
Equipment 0 0 0 12,620 12,620
CISCO Training 0 0 0 700 700
Total 113,371 6,772 120,143 210,232 90,089
Original budget (US$) Actual 
expenditure 
(US$)
Over/(Under) 
Expenditure 
Expense category (US$)
46
8.4 Recommendations for Faulu
Issues identified Implications Recommended actions for FKL
The projects did not provide
sufficient information to enable
management to effectively control 
the projects. For example:
· Management set budgets and 
time frames for the LTS
project without detailed
specifications and planning –
the result is that the budget 
(though overspent),
constrained the project. 
Consequently further
development work that still
needs to be done could be
hampered by budgetary
constraints.
· Discussions with several
senior managers failed to
surface the non-ambiguous, 
quantifiable objectives of the
BPI project
Cost overruns, unsuccessful
projects, over or under-investment 
in important projects, unmet
business needs, over-engineered 
projects. 
Detailed and structured planning
of projects to ensure:
· Institutional needs are
properly diagnosed
· Costs are properly controlled 
· Project delivery timetables are 
properly controlled.
FKL’s disaster recovery plan
(DRP), though existent, is not
documented
The fact that the plan is not
documented implies that FKL is 
over-reliant on the continued
employment of the IT Manager
and his personal recollection to
manage disaster risks.
FKL is at the stage in its growth 
when it should be focusing on
building institutions to reduce its 
reliance on individuals and
safeguard institutional continuity. 
The DRP should be documented 
as soon as possible to facilitate
delegation and continuity should 
there be a change in the IT
Manager position.
47
8.5 Recommendations for USAID
Issues identified Implications Recommended actions for
USAID
The large variations in the scope 
of the MIS related projects are as a 
result of insufficient work done at 
proposal stage in identifying and 
prioritising the institutional needs 
of FKL.
Poor control over project and
significant variations of project
scope during implementation.
Future projects of a similar nature 
to be funded by USAID Micro￾PED should be preferably be
within the context of:
· Completed, thorough and
prioritised institutional needs 
assessment
· An IT strategy to ensure that 
the recipient of the funding
has clearly thought the project 
through and understands their 
priorities and their strategic
contexts
· Detailed and thorough project 
plans to facilitate ex-poste 
review of time, cost and
human resource utilisation
efficiency in project
implementation
48
9 Networking 
Faulu Kenya has played a significant role in the founding of the Association of Micro finance 
Institutions (AMFI) in Kenya. AMFI is made up of institutions that deliver micro-finance 
services and runs a full time secretariat that continually addresses common problems and 
issues within the MFI industry in Kenya. AMFI is currently working with the Government 
and various other stakeholders to see to the enactment of a Micro-finance Act that will enable 
such institutions to be recognized and licensed under a specific law that will enhance their 
ability to offer more broad based services. Private capital can also be attracted into the sector 
through a law of this nature. Faulu Kenya’s Chief Executive is the current Vice Chairman of 
AMFI and also a Director of the African Micro-finance Network (AFMIN), based in Abidjan, 
Cote de Ivoire.
49
ANNEX 1: TERMS OF REFERENCE FOR PROJECT EVALUATION
A. BACKGROUND TO FAULU KENYA 
Faulu Kenya is a Microfinance institution with close to twelve years experience of offering 
financial services to MSEs in urban and rural Kenya. 
Registered in Kenya as a limited liability under the Companies Act, and whose sole
shareholder is Food for the Hungry International (FHI), Faulu currently is serving over 20,000 
clients, and has a total portfolio of over Ksh 500 million. Faulu has ten Business Hubs (Units) 
spread across 27 districts in Kenya, and a staff of 118 members. 
A 7 member Board of Directors governs Faulu Kenya. A detailed profile of Faulu Kenya is 
attached to this terms of reference.
B. BACKGROUND TO THE USAID FUNDED PROJECT
Three years ago, Faulu Kenya sought a grant from USAID, to strengthen its capacity towards 
becoming a fully commercialized microfinance company having shifted from an NGO 
platform. The four key result areas for institutional capacity building were as follows:
· Faulu Kenya Ltd (FKL), mission and strategic goals clearly articulated and lived out by 
the board, Management and staff
· FKL systems, established to effectively and effectively achieve the mission and 
strategic goals of the company
· FKL with a capacity to attract resources needed to achieve the mission and strategic 
goals of the company
· FKL with productive linkages with a variety of networks, organizations and agencies in 
the country and the region
On February 28, 2001, the U. S. Agency for International Development (USAID), Mission to 
Kenya (mission) approved support to Faulu/Kenya, under the USAID MICRO-PED project to 
carry out this program on capacity building. This would also enable Faulu Kenya to provide more 
micro-finance services to micro and small enterprises The support was for an amount of 
$430,450. 
Initially the grant was sought for two years but a no-cost extension was granted for a third 
year, ending February 2004.
Some of the specific purpose to which this support was to be applied is as follows:
· Strengthen the role of the Board of Directors through workshops and exposure visits
50
· Human resource development: Training and exposure visits for management and credit 
officers.
· Research and product development: Develop new products and services, active research 
on indigenous systems for micro-lending and savings; develop growth and market 
penetration strategies for existing and new markets; strengthen lending procedures and 
operations.
· Systems development: Up-grade the loan tracking system and improve management 
information system; establish internal control systems.
 The funds were to be utilized under the following program budget line items:
Governance Development 32,502
Management & Staff Development 92,156
Research and Development 47,399
Institutional Analysis 56,700
Audit, Evaluation and Monitoring 42,139
Training and Equipment 12,300
Loan Tracking Systems/Hard/Soft 125,254
Program Vehicle 22,000
Total 430,450
Faulu\Kenya was required to contribute $112,090 as a cost share match.
C. PURPOSE OF THIS EVALUATION
The purpose of this is to:
1. Assess the progress of the project in achieving its objectives
2. Assess the efficiency, effectiveness of the project implementation mechanisms
3. Determine the impact of the project on Faulu Kenya
4. Provide specific recommendations for Faulu Kenya and USAID that will guide the
design and implementation of similar projects in the future
D. SCOPE OF THE EVALUATION
The evaluation will be carried out against the expected project impact/result areas that had 
been set out at the beginning of the project. 
I. PRE-REVIEW STEPS
ß The evaluator is expected to review the applicable documentation and program reports 
considered necessary to perform the review and, 
51
ß All applicable procurement policies and procedures; receipts, warehousing and distribution 
procedures for materials, supplies and equipment necessary to successfully complete the 
required work will be availed. 
Further, towards the achievement of the results look at the following areas:
II. EFFICIENCY 
Efficiency in the use of project funds, analyzing the relationship between the inputs and 
activities versus the outputs/ outcomes. Assess in particular whether
ß The original workplans have been complied with? Achievements? Major
deviations? Causes for the deviations? Effects of such deviations?
ß Were the resources efficiently transformed into outputs?
ß Were the activities consistent with and adequate for achieving the planned
outputs/outcomes
ß Assess the quality and procedures and processes and methodologies utilized by 
those involved
ß Assess the institutional arrangements adequacy towards the support and efficiency 
of management and usage of resources to achieve the results
III. EFFECTIVENESS
Effectiveness towards the utilization of resources to achieve the results/outcomes
Towards the result areas/ set outcomes assess whether these were effectively achieved. 
Specifically
ß Look at benefits of the project to date
ß Have the outputs contributed to the achievement of these benefits?
ß Opinions of project partners towards the effectiveness of the project and
suggested improvements for future
ß Unforeseen outcomes and reasons for differences
IV. IMPACT
Briefly assess the impact of the project to date on Faulu Kenya Limited, with particular 
attention to all the result areas and budget items. Access changes in business management, 
levels of income, business volumes, employment creation, investment, confidence etc
V. SUSTAINABILITY
52
Towards this assess the project’s positive outcomes/results continuity. Specifically the 
evaluation to look at; 
ß Interest of sustaining the results that has been created in the institution
ß Ability and commitment to continue with project implementation and maintenance
ß Ability for the outcomes to be self sustaining or to increase institutional self sustainability
ß Assess the risks that could limit the sustainability of the project and how these can be 
minimized or mitigated
VI. CROSS CUTTING THEMES
Evaluate the project results/ outcomes against the cross-cutting themes touching on
ß Gender
To what extent the needs, constraints and possibilities of women taken into account at
implementation stages
ß Environment
Assess the extent to which issues relating to the environment were taken into consideration in 
the implementation of the project and the overall impact if any on the same
E. DELIVERABLES
A key outcome of the consultancy is a report of the evaluation exercise. Three copies of a 
draft report will be provided to Faulu Kenya – that addresses the issues above and specific 
recommendations of the evaluation. A final report will be prepared incorporating comments 
by Faulu and USAID. The consultant shall submit a final report on a 3 ½ diskette in MS Word 
and three hard copies. Acceptance of the report by Faulu will be contingent upon the report 
adequately fulfilling the scope of work and addressing major important areas of inquiry 
outlined in the scope. 
The report will follow the format below:
a) Executive summary
b) Table of contents
c) Main body if the Report
d) Annexes (if appropriate)
F. PLAN OF WORK
Prepare a work plan towards accomplishing this assignment.
53
G. TEAM COMPOSITION AND REQUIRED EXPERTISE QUALIFICATIONS
The evaluation team shall include one specialized professional in the microfinance sector with 
special skills on micro lending, microfinance management, information systems, and
institutional development activities
Required Qualifications
- Extensive experience in microfinance operations and exposure to a variety of
Microfinance institutions and models in Kenya and other parts of the world
- Masters in finance, management, economics, financial analysis, development studies 
and/or the social sciences
- Experience in working with NGOs or non-banking microfinance institutions
- Knowledge of microfinance best practice methods
- Excellent consulting and communication skills with demonstrated ability to work 
collaboratively at a senior level
- Previous experience in evaluation and impact assessing
H. LOGISTICAL SUPPORT
The consultant shall be responsible for all logistical support required for this assignment 
including secretarial services, photocopying, telephone services, travel and accommodation, 
etc
I. REPORTING REQUIREMENTS
The work is expected to start on/or about February 27, 2004 and the final report submitted to
Faulu on or before March 26, 2004. A briefing by Faulu and USAID will take place at the start 
of the consultancy and there will be a debriefing for stakeholders at the end of the evaluation.
J. SELECTION CRITERIA
The consultant for the evaluation will be selected according to the following criteria:
· Masters in finance, management, economics, financial analysis, development studies 
and/or the social sciences – 15 Points
· Extensive experience in microfinance operations and exposure to a variety of
microfinance institutions and models in Kenya and other parts of the world – 20 Points
· Previous experience in evaluation and impact assessment – 30 Points
· Experience working with developmental NGOs or non-bank MFIs – 20 Points
· Experience in consulting and communication skills with demonstrated ability to work 
collaboratively at a senior level – 15 Points