Kenya: Microfinanciers’ customer deposits surge to Sh15.4bn

By Geoffrey Irungu, Business Daily Africa

Deposit-taking microfinance institutions (DTMs) have raised their deposit levels by Sh5.4 billion to Sh15.4 billion, helping them to cut reliance on borrowing to lend.

Data released by the banking sector regulator shows total borrowings by the microfinanciers came down to 34 per cent of their total funding sources in 2012, compared to 43 per cent in 2011.

On the other hand, deposits represented 48 per cent of the DTMs’ total funding sources, in a balance sheet shift that is expected to help borrowers get cheaper loans.

“This is an indication that customer deposits have become an important funding source for DTMs, business and therefore the institutions are relying less on borrowed funds,” the Central Bank of Kenya said in its latest supervision report on banks and DTMs.

But the CBK noted that a good amount of the deposits was in loan guarantees, meaning the deposits are held until the loan is paid in full and can then be withdrawn.

“However, a considerable amount of the deposits are attributable to customers’ loan guarantee funds. Loan guarantee fund is the cash collateral representing funds that must be contributed by borrowers as a condition for receiving a loan and may be withdrawn in the event that all group members have re­paid outstanding loans. The challenge for the institutions is to maintain the momentum by developing innovative strategies for deposit mobilisation,” said the CBK.

The Association of Microfinance Institutions (AMFI) is currently engaging the CBK to allow the DTMs issue their own cheques and operate current accounts as part of mobilising deposits.

“It has been a sort of culture change because clients were only used to the microfinance as avenues for borrowing, not saving. So MFIs have been doing sensitisation of their clients to save with them,” said Patrick Lumumba, a senior programmes officer at the AMFI.

Mr Lumumba said many DTMs have realised the need to use ATMs to win and maintain clients especially as part of mobilising deposits.

(Read: Micro lenders’ deposits rise to Sh7bn)

Central bank data shows that Kenya Women’s Finance Trust has the largest market share of 61.5 per cent of the total followed by Faulu, which holds 23.7 per cent and the third is SMEP with 9.4 per cent.

The DTMs market share is based on a weighted composite index comprising assets, deposits, capital size, number of deposit accounts and loan accounts.

In terms of assets alone, KWFT holds Sh21.3 billion against the Faulu’s Sh8.2 billion and SMEP’s Sh2.5 billion—out of the industry total of Sh34.2 billion. This means the top three DTMs hold 93.7 per cent of the total industry assets.

Other DTMs are Rafiki, Remu and Uwezo holding Sh1.9 billion, Sh193 million and with Sh91 million, respectively, in gross assets.

Kenya: Micro-financiers set to blacklist serial loan defaulters

By George Ngigi, Business Daily Africa

Microfinance institutions (MFIs) are set to begin submitting names of loan defaulters to credit reference bureaus next month, further locking out bad borrowers from the accessing debt.

The micro-financiers will only share the data among themselves in the early stages of the initiative, while waiting for the law to be reviewed to allow them to open up their data to other credit providers.

“We are working with a June target for our members and September for the industry as a whole,” said the CEO of the Association of Microfinance Institutions (AMFI), Benjamin Nkungi.

MFIs have been seeking to access information held by credit reference bureaus on serial loan defaulters on fears of giving credit to blacklisted borrowers, who turn to them after being locked out by banks.

Commercial banks have increased their usage credit bureaus to lock out defaulters, making MFIs vulnerable to such borrowers.

Mr Nkungi said that they will be relying on the fact that the Micro-finance Act of 2006 does not outlaw sharing credit information to blacklist defaulters.

He, however, acknowledged that the law is not clear on sharing of customers’ information, which is considered confidential.

“There will be need to change clauses on the loan application forms to get consent from borrowers and to offer financial education so that they can understand the benefit of this system,” said Mr Nkungi.

Credit information sharing is meant to reward good borrowers by giving them a bargaining tool for lower interest rates and lower collateral requirements.

Lack of robust information systems is also a challenge to micro-finance institutions, with the association stating that some of them use excel sheets to compile their data.

“For institutions that do not have resources to invest in IT infrastructure we are going to use cloud computing platform-where you pay for use. We are already discussing with a few providers,” said Mr Nkungi.

Consultants hired by the association also said the practice by microfinance institutions to push guarantors to settle loans in default exposed the system from failing to capture some serial defaulters.

Most of the institutions give loans to members of a group who co-guarantee each other. In case of defaults, other group members are expected to settle the loan balance.

The minister of finance last year proposed review of the Banking Act to allow information sharing between banks and deposit taking microfinance institutions.

There are six deposit taking micro-financiers in the country compared to 43 institutions that are members of AMFI.

Kenya: Stringent rules push microfinance firms into losses

By George Ngigi, Business Daily Africa

Stringent regulations are making it hard for Central Bank of Kenya (CBK) licensed micro finance institutions to operate profitably, a new research has found.

The survey by Financial Sector Deepening (FSD) states that the conversion from a credit microfinance institution to a CBK-licensed, deposit taking micro lender is a costly venture that is made even more expensive by elaborate regulatory requirements.

“The current CBK requirements, especially with regard to branch security and prudential ratios, are not adapted to the microfinance business in Kenya. To encourage other organisations which are performing well to transform, a review of actual risks for DTMs would be necessary to lower some of the requirements and therefore costs,” reads the FSD report.

Faulu Kenya, Kenya Women Finance Trust (KWFT) and SMEP are some of the microfinanciers that have converted to deposit-taking institutions.

Some of the changes that the micro-finance institutions had to make include the installation of security devices, setting up new information technology infrastructure and recruitment of staff with a banking background.

“The challenge in transformation is not in meeting the regulatory capital requirements, but in realising the related costs to comply with the non-capital requirements.

Key among these is investment in ICT/MIS and the establishment of a deposit-taking infrastructure,” said FSD Kenya.

The micro-financiers were in agreement with the report, saying several amendments to the law were needed to address emerging bottlenecks.

“Most institutions are not able to meet those requirements because of cost; you can’t transform without Sh10 million and for most institutions their capital base is less than Sh50 million,” said Association of Microfinance Institutions (AMFI) CEO, Benjamin Nkungi.

Mr Nkungi said that institutions that set up as DTMs from the onset were not having a problem complying with the regulatory requirements, but those seeking to convert were bearing the brunt of the new laws. Newly set up DTMs include Remu and Uwezo DTM, with the latter being a community-based institution.

The ones that have converted have declared a drop in earnings in the first year of operation owing to high costs of conversion. Faulu Kenya was the first to convert to deposit taking in 2008, a venture that pushed them to losses of Sh130 million by end of 2010.

The conversion process also cut the net earnings of KWFT to Sh321 million from Sh676 million.

Since introduction of the DTM rules in 2008, CBK has amended them to allow for the use of the outlets that existed before the conversion as business units, said Mr Nkongi.

To ensure protection of customer funds, especially in the microfinance segment whose risk exposure is considered to be high, the Central Bank has been demanding higher reporting standards and loan provisioning from the lenders.

While DTMs are supposed to classify a loan that is not serviced for more than three months as a loss, the banks have six months to provide for the same.

“Yes you are trying to meet stringent rules, but it is good to determine the strength of the industry. We appreciate that when entering the financial sector there is need to interrogate those coming on board,” said Michael Gichohi, managing director of Uwezo DTM.

Mr Nkungi also said that limitation of shareholding for individuals or an organisation to 25 per cent is an impediment as most of the micro-finances were ran by NGO’s or individuals.

The rule, which is similar to regulations in the commercial banking sector, is intended to safeguard against domination by single individuals, which could weaken corporate governance standards.

“Existing shareholders are having problems getting new shareholders to come in with same financial muscle,” said the association executive.

Kenya: Women in Kenya benefit most from microfinance sector

By Bedah Mengo, Xinhua

The micro-finance sector in Kenya has become synonymous with women as many continue to seek services from the industry that is growing fast in the East African country.

According to the Association of Micro-Finance Institutions (AMFI), there are 52 institutions registered under the umbrella body in Kenya, compared with less than five in the 1990s. Many other organizations are also seeking to be registered.

The Central Bank of Kenya (CBK) also said the microfinance sub-sector has achieved tremendous growth in the past decade.

The growth has been attributed to women, who are the chief beneficiaries of loans and other financial services offered by micro-finance institutions.

Joan Mwikali, the leader of a women’s group belonging to Kenya Women Holding (KWH), an offshoot of the micro finance institution that offers them formal banking, told Xinhua that over 90 percent of KWH’s 500,000 members are women.

“Micro-finance institutions deal with groups, not individuals. Women are good in making and staying in groups, whether for social or financial reasons. This has made them become the biggest beneficiaries,” she said.

Therefore, women’s ability to mobilize themselves in groups, according to Mwikali, has seen them edge out men and the youth from the institutions that target small-scale traders.

“I am yet to see a group in KWH in our area which is led by a man. All of them are led by women, though there are some men in the groups,” she said.

“Being in a group demands that one should attend meetings every week and make contributions and when one is in need of a loan, the group will act as the guarantors,” she explained.

The micro-finance model of working with groups, she said, discourages men from seeking services from the institutions.

“Most men would rather go to a bank and take a loan than attend meetings, make contributions for a specific period and thereafter apply for a loan. Men do not have that patience,” she said.

“It is true that women are the sole beneficiaries of micro-finance in Kenya, but that should not be the case. These institutions, whether they bear the word women in their names are to serve all genders,” she said.

It is a similar situation at Small and Micro Enterprise program (SMEP), a micro-finance institution.

An employee of the company in Nyanza province identified as Benson said that most of their clients are women.

“Over 95 percent of people we deal with in the region are women. In some areas, we do not have male clients,” he said.

Benson noted that exclusion of men from micro-finance institutions activities is mainly because of cultural reasons.

“Men want to stand on their own as culture demands. They do not want to be in groups, which micro-finance institutions deal with, because they believe that makes them appear ‘weak’”, he said.

And the fact that the institutions over the years have taken a feminine look has not helped matters for men.

“I once went to talk to a group of men at a village meeting to appeal to them to join our institution, apply for loans and start businesses but they dismissed me. They told me micro-finance is a women’s thing,” he said.

Mwikali said that women’s dominance of the institutions has also been brought about by years of financial seclusion and desire to become financially independent.

“Women in Kenya started to form groups where they contributed money and gave each other on a rotational basis even before micro-finance organizations sprouted up. This was to help them gain financial independence,” she said.

“So when microfinance institutions started, it was easier to work with the groups, which is why women have dominated the sector,” she added.

The World Bank also notes the institutions are helping African women get involved in building their countries’ economies as they engage in income-generating activities to support their families.

It is estimated that women comprise 74 percent of the 20 million people being served by micro-finance institutions around the world.

At the same time, a rise in the number of institutions has helped to improve access to financial services in the sector, from 1.7 percent in 2006 to about 10 percent currently.

To spur growth in the industry, CBK changed its laws to allow the institutions take deposits, acting as banks, and mobilize savings.

As in June this year, the institutions had opened 44 branches across the East African nation. The number of borrowers with loans from the institutions was close to one million.