By Bosire Nyairo

NAIROBI, May 2 (Reuters) - Selling vegetables at a stall in a filthy open-air market in Nairobi, Fatma Amina barely makes enough to feed her four children, let alone give them an education that would lift the family out of poverty.

The Kenyan government receives millions of dollars in aid to fight poverty, but little of it is available to small traders like Amina unless they can put up collateral.

"I hear of donors but where are they?" Amina said.

But that situation may be changing as African countries follow the lead of Asia, where tens of millions of people have obtained small loans thanks to an explosion of microfinance operations.

Kenya's new Microfinance Act, signed into law late last year, provides a legal framework regulating lenders, known in the industry as microfinance institutions (MFIs).

"It makes business sense for the government to have a clear policy because this is the fastest growing sector of the economy," said Winnie Kathurima, a general manager at Equity Bank, which won an international award in 2005 for its role in providing loans to micro-entrepreneurs.

Microfinance has been around for decades, but has mushroomed in recent years, especially in Asia where nearly 100 million people have access to microcredit, according to the Microcredit Summit Campaign, which hopes to bring microcredit services to 175 million of the world's poorest families by the end of 2015.

FOCUS ON AFRICA

In Africa, the poorest continent, the campaign's figures show only 7 million people had access to microcredit at the end of 2005.

Germany will press rich nations at a G8 summit in June to create a microcredit fund for African entrepreneurs as a way to help the continent's poorest, International Development Minister Heidemarie Wieczorek-Zeul said in February.

"There's a long way to go. It may look daunting, but there is such a huge potential for growth and that's the region where we are most likely to see the biggest growth," said the Microcredit Summit Campaign's research director, Anna Awimbo.

"There's a huge demand and what's really required is for governments to create a conducive environment for the establishment of MFIs -- demand will not be a problem," she said.

Some governments have already made progress.

Kenya's partners in the East African Community, Tanzania and Uganda, have also brought in new laws governing the industry, which Awimbo said should allow microlenders who meet certain standards to offer savings accounts, thereby giving them access to more money to lend.

Microfinance shot into the headlines last year when Bangladeshi economist Mohammad Yunus and the Grameen Bank he founded picked up the Nobel Peace Prize for their grassroots drive to end world poverty through microlending.

Because of the higher unit costs, microcredit interest rates are higher than normal bank rates, often around 15-35 percent.

Yunus's Grameen Foundation, which promotes access to microcredit, says that is preferable to paying loan sharks or money lenders rates of 120-300 percent a year.

TWEAKING THE ASIAN MODEL

Operators in Africa may have to adapt the Asian model to the conditions on the continent.

"One obvious difference is the population density. (In Asia) you did have population density, which gives economies of scale. I would say that is one of the biggest barriers in Africa," said Sam Daley-Harris, director of the Microcredit Summit Campaign.

"It's much easier for one bank worker to reach 400 clients who are jam-packed in villages next door to each other than to reach 400 clients spread out in rural areas, which is why so much microfinance in Africa is urban," he said.

"Uganda is probably the most saturated microfinance country thus far, and still the reach to the rural areas is not strong."

Technology may have some of the answers.

Some operators are looking at using pre-paid phone credit and Africa's rapidly expanding mobile networks to transfer money and make repayments, reducing the need for credit agents to travel from village to village collecting tiny amounts of cash.

Better communications and credit monitoring will also help.

Kenya's new law, for example, encourages lenders to pool information on borrowers' credit history, drastically reducing the risk of default, said Jean-Philippe Prosper, senior manager for Eastern Africa at the International Finance Corporation (IFC), the private sector arm of the World Bank.

"Banks are presently unwilling to lend to small enterprises due primarily to lack of good information," he said.

"International experience suggests that the use of credit information allows banks to reduce loan processing time and cost by 25 percent or more and lower default rates by 40-80 percent."

Such cost-saving measures could be crucial to future growth.

Gremeen Foundation President and CEO Alex Counts said some African countries had already demonstrated ways to nurture microfinance, such as Morocco, where new regulation and government backing had triggered an explosion of microcredit.

"Within six years microfinance outreach went from 10,000 to more than half a million," Counts said.

"If this kind of growth happens in the most populous countries, then things will start to change very quickly, and if it's done correctly the G8 fund could be a big part of that," he said.

"Africa could catch up with the average country in Asia in a matter of 5 to 8 years." (See also: "Loan officer hunts for client in Congo alleys" [ID:nL26408864]; "INTERVIEW-Microloan launches Cape Verde's 'Maria Biscuit'" [ID:nL26303016]; "FACTBOX-Microcredit and microfinance, questions and answers" [ID:nL25419472]) (additional reporting by Alistair Thomson in Dakar)

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