By Peter Kiragu, The Star

DEPOSIT taking microfinance institutions will soon be allowed to operate current accounts just like banks, according to new proposed regulations by the Central Bank of Kenya. The move will help the DTMs to boost their deposit mobilisation capacity and will place micro-lenders in a good position to compete with commercial banks. “The deposit taking microfinance institutions are at a disadvantage as compared to banks offering microfinance products as the former can neither issue third party cheques nor open or operate current accounts,” the proposed regulation says in part.

To this effect, the CBK has also recommended that DTMs be allowed to participate in the national payment system including issuing of third party cheques. CBK wants to overhaul the current microfinance Act in a move that might also see DTMS being allowed to trade in foreign currencies and in financing of foreign trade, role currently reserved for banks only.

Microfinance institutions has been prohibited from carrying most of these activities since 2001 when the Microfinance Act was drafted. The rationale was that these financial activities should remain with the commercial banks since banks had a different niche market and would not necessarily enter into the microfinance market. The last ten years has seen dynamics within the microfinance industry changing with the distinction between banking business and microfinance business becoming thinner and thinner.

For instance, a number of MFIs have entered into the regulated arena and are offering a wider range of financial products, including credit, savings, transfer, payment services amongst other services. A number of banks are also making foray into the microfinance sector. Industry players have also raised concerns that unregulated credit only microfinance entities poses a business threat to licensed DTMs and reputational risk for the financial sector.

“In this regard, it is proposed that regulations for credit-only MFIs be put in place to govern their conduct,” CBK says. It has also been suggested that the use of the word “microfinance” by unregulated institutions be restricted, while licensed DTMs be allowed to use the words “microfinance bank‟ to distinguish them explicitly from credit only entities.

The proposed changes will also see costs for setting up branches for DTMs reduced as well as allowing the micro-lenders to use third party agents, marketing offices and satellite branches. Also to be reviewed and not covered by the current Act include areas such as stress testing, outsourcing, mergers and amalgamations and Shariah compliant financial services. The CBK is now calling for comments from players on the proposed changes.

There are currently six licensed DTMs in the country with a branch network of 63 branches by the end of May 2012. During this period, the gross loans and advances for the 6 DTMs stood at Sh17.74 billion compared to Sh16.5 billion registered in December 2011 thus translating to a growth of over 14.1 per cent. Similarly, the deposits base during the same period stood at Sh 11.64 billion representing a growth of over 7.5 per cent from Sh10.2 billion in December 2011.