Kenya: CBK Licenses the ninth deposit taking Microfinance Institution – U & I Deposit Taking Microfinance Ltd
The Central Bank of Kenya (CBK) has granted a licence to U&I Deposit Taking Microfinance Limited (hereafter referred to as U&I DTM Limited) to carry out community deposit-taking microfinance business. The licence has been issued pursuant to Section 6 (1) of the Microfinance Act, 2006 and Regulation 5 (3) of the Microfinance (Deposit-Taking Microfinance (DTM) Institutions) Regulations, 2008. U&I DTM Limited becomes the ninth deposit taking microfinance institution (DTM) to be licensed following the licensing of seven nationwide DTMs (Faulu Kenya DTM, Kenya Women Finance Trust DTM, SMEP DTM, REMU DTM, Rafiki DTM, Century DTM and SUMAC DTM) and one community-based DTM (Uwezo DTM). U&I DTM Limited, which is the second community DTM to be licensed under the Microfinance Act is a wholly-owned Kenyan company limited by shares, intends to operate within the Nairobi Central Business District (Starehe Division).
U&I DTM Limited has set up its head office cum branch along River Road (Asili Complex Building next to Kampala Coach Booking Office), Nairobi. The Applicant intends to begin operations with one flagship branch with intent to expand with time. Previously, the entity was engaged in credit only microfinance business before they transformed to a community DTM. The DTMs primary focus is the Micro and Small Enterprises (MSEs) as well as the financially excluded populations. The DTM also intends to target institutional-based employees in schools, colleges, restaurants, factories, and manufacturing industries situated in the Nairobi Central Business District (Starehe Division).
It is reported that micro, small and medium enterprises (MSMEs) and the informal sector represent over 90% of private businesses and contribute to more than 50% of GDP and account for about 63% of employment in most African countries. These enterprises thus form an integral part of the Kenyan economy by providing employment opportunities and contributing to economic growth and sustainable development. Despite these opportunities they face many challenges, including access to finance, which is often considered to be their most significant challenge. The Central Bank has thus been in the forefront in developing an all-inclusive financial system that reduces impediments to accessing finance, including MSMEs financing. The Central Bank has initiated, and will continue to support, reforms to develop effective legal, regulatory and supervisory frameworks that support innovations to enhance the development of MSME financing and growth.
The licensing of U&I DTM Limited to focus on MSMEs as one of its key niches thus reiterates the Central Bank’s commitment to the development of an all-inclusive financial system that serves different market segments with appropriate products. This is in line with CBK’s mandate to enhance financial inclusion and promote economic growth in Kenya, which are key tenets of Vision 2030.
By Charles Mwaniki, Business Daily
Microfinance institutions that got Central Bank of Kenya’s approval to collect customer deposits have raised nearly Sh7 billion in about two years, the lenders’ financial statements for 2012 show.
This has given the deposit-taking microfinance institutions (DTMs) headroom to cut their reliance on expensive borrowings as increased customer deposits provide an alternative source of cash.
The 2012 financial results of Faulu Kenya DTM, Rafiki DTM, SMEP DTM and Kenya Women Finance Trust (KWFT) DTM show their collective customer deposits rose by 168 per cent, from Sh2.6 billion in 2011 to Sh6.9 billion in 2012.
Borrowings on the other hand went up by only four per cent in the second year since the DTMs were licensed, while the income from interest on loans went up by Sh1 billion or 23 per cent, reflecting the expanded loan books.
Faulu Kenya for instance saw its loan book rise from Sh3.3 billion in 2011 to Sh5.03 billion last year. Its borrowings went down from Sh2.42 billion to Sh2.16 billion as customer deposits rose by Sh2.35 billion to stand at Sh2.98 billion in 2012.
Rafiki general manager George Mbira said the increased customer deposits had helped them reduce the dependence on borrowed funds.
“We now have close to Sh600 million in deposits, helping us expand our loan book. For us, when we borrow in foreign currency, we can get a good rate of about four per cent, but when you factor in hedging costs the rate rises to around 15 per cent,” said Mr Mbira.
This increase in income helped three of the DTMs record big rise in profitability, with only KWFT recording reduced profits from Sh302.4 million in 2011 to Sh173.8 million in 2012 following an increase of Sh345 million in staff costs.
Faulu Kenya net profits for 2012 went up by 119 per cent from Sh25.6 million in 2011 to Sh58.2 million. SMEP reported a 104 per cent rise in net profit to Sh53 million from Sh25.8 million in 2011.
Rafiki turned around a net loss of Sh15.4 million in 2011 into a Sh5 billion profit in 2012.
Remu, Century and community-based Uwezo DTM are yet to report their full year results, having been set up less than one year ago.
Mr Mbira, however, noted that there were challenges for DTMs seeking to establish their presence in the market given the stringent regulations and problems with capital and technology.
“We are lucky because we have a banking background with our partner bank (Chase Bank). For DTMs, the infrastructure costs to set up banking halls are high, up to Sh70,000 per square foot, and also setting up the technology required. Customers are used to high standards in banks, and you have no choice but to keep up,” said Mr Mbira.
The rules hit harder on microfinance institutions seeking to convert to DTMs than those setting up as DTMs from the onset. SMEP chief executive Phyllis Mbungu said that while mobilising customer deposits is slower than they would like, they expect CBK and Treasury to change rules to allow DTMs attract big depositors.
“At the moment we are not able to offer current accounts or cheque books. We expect the regulatory framework to change to clear these hurdles and enable us attract the big savers,” said Ms Mbungu.
DTMs are also at a disadvantage when it comes to provisions for bad loans as they are supposed to classify a loan that is not serviced for more than three months as a loss, while banks have 12 months.
Ms Mbungu said the outlook remains bright, adding that her institution is eyeing a key role in disbursing the Sh6 billion women and youth fund promised by President Uhuru Kenyatta.
By George Ngigi, Business Daily Africa
Century Deposit Taking Microfinance (DTM), which will be based at Gikomba, becomes the seventh such institution to be licensed by the regulator following to passage of law allowing for their creation in 2008.
“The DTMs’ primary focus is agricultural finance and, in this regard, the DTM intends to target smallholder farmers by offering agriculture-based credit and savings products,” said the CBK in a statement.
The Central Bank said that Century DTM would adopt a value-chain approach while lending to farmers which will see it finance them in four stages: preparatory, pre-harvest, post-harvest and processing stages in order to protect itself from the high risks associated with agriculture financing.
Century DTM is a nationwide institution indicating that it could open branches in countrywide unlike the community-based ones such as Uwezo DTM whose operations are limited to specific location. Uwezo confines its operations to Starehe Division in Nairobi.
The introduction of the law allowing creation of DTMs was expected to see older microfinance institutions (MFIs) transform themselves into the new entities due to their grassroots presence but it has instead seen mostly new institutions such as Century, Rafiki and Remu DTM come up.
Faulu Kenya, Kenya Women Finance Trust and Small and Micro Enterprise Programme are the only MFIs that have transformed into DTMs.
The failure of most MFIs to change into DTMs has been attributed to tough conditions put in place by the regulator. The stringent conditions have seen those that had transformed suffer a huge drop in earnings discouraging other players from converting. The essence of transforming to deposit taking was to allow the institutions access cheaper funds, which they could then lend to the public at a lower rate rather than depending on expensive credit from financial institutions, which forces them to charge high rates on their borrowers.
However, the cost of new recruitment, staff training, physical and information technology infrastructure upgrade has proved to be higher than the benefit of collecting cheaper profit.
The CBK has said that it is willing engage in talks with the MFIs on the terms while also allowing them to use their previous sales office as branches.
Deepened financial inclusion has been a major agenda of the regulator which has seen it introduce the concept of DTMs, agency banking and mobile banking.
As at the end of June, the deposit taking micro-finance institutions had mobilised deposits worth Sh12.3 billion with a total loan portfolio value of Sh17.9 billion.
Expensive microfinance loans in Kenya are driving smallscale businesspeople away from the same institutions that are supposed to boost businesses and help in eradication of poverty.
Most businesspersons are shunning loans from the institutions due to high interest rates and strict repayment conditions, which make the loans hard to service. Most micro-finance institutions in Kenya charge interest rates that range from between 1.8 per cent to 2.5 per cent per month. Others, on the other hand, charge at least 0.5 per cent per week.
This translates to between 21.6 per cent and 30 per cent per year. The institutions have repayment periods of weekly and monthly depending on the size of the loan, lending rules and how one agrees with other members of the group ran by the micro-finance institution, who jointly act as guarantors of the loan. Moreover, since most of the loans offered by the institutions do not have grace period, borrowers start servicing the loans as soon as they receive them.
All this means that interest rates from micro-finance institutions are higher than that of most commercial banks, whose lending rates are between 21 per cent and 24 per cent. The institutions lowered their rates by 1.5 per cent after the Central Bank of Kenya (CBK) reduced its benchmark-lending rate by the same percentage point in July following a drop in inflation to below 10 percent and stabilisation of the shilling.
But while banks cut their lending rates, micro-finance institutions — which are normally funded through concessionary loans from international financial institutions — did not since many were not affected by CBK‘s move.
“Maintaining a loan from microfinance institution is expensive, even if it is a small amount. It is only when you complete servicing the loan that you realise to almost paid double the amount you borrowed,” says Margaret Akumu, who was a member of a microfinance institution until recently.
Akumu, who runs a groceries store in Komarock estate in Nairobi, said she quit the institution after taking two loans and struggling to repay them.
“The first time I borrowed $240 (Sh20,000) to boost my business and repaid in six months. I borrowed about double the amount the second time after I was encouraged by the organisation officials,” she said. The loan, according to the trader, literally broke her back as she struggled to repay.
“As usual, there was no grace period. I started repaying it the following week even before I had bought stock for my grocery. Each week, I was taking to the group at least $15 (Sh1, 260),” she said.
And unlike the first time, Akumu said she found the loan difficult to service because of the higher installments.
“There is a week I defaulted and officials of the organisation and members of my group did not like it, since they had also guaranteed the loan,” she said. Several months later when she cleared the loan, Akumu said she decided to quit the institution.
“I noticed that my business had barely improved despite taking loans to boost it. What really burdened me was the mode of payment since sometimes I would forego buying stock for my shop to repay the loan,” she said.
The loans, according to Akumu, also made members of the group turn against each other.
“Normally, when someone defaults in paying her loan, group members go to auction her property to recover the cash. And since most groups are made up of people who know each other, the exercise makes them enemies. There is a time I went to auction the property of a friend and I could not stand it,” she said.
Joan Mwikali, a leader of a women group in Nairobi belonging to Kenya Women Holding, acknowledged that she has lost several members of her group.
“Most of them, especially those we started the group with, left after repaying their loans citing high interest rates. Others could not cope up with the strict conditions that they must adhere to in the group,” she said.
Since mid last year, Mwikali observed they have lost about six members.
“We have recruited new members but they cannot compensate for the ones who left since they had huge deposits and had helped to build the group,” she said.
In the groups, members are encouraged to take loans regularly to keep funds revolving.
“KWH officials encourage members to take loans once they complete servicing another, but people are now reluctant to do that,” she said.
In a recent study on microfinance in Kenya and Uganda, University of Nairobi economics lecturer, Joy Kiiru, and her Ugandan counterpart, Flavian Zeija, found that microfinance loans were burdensome to low-income earners. The researchers observed that most of the institutions were exploiting unregulated structures to fleece clients, with some of their practices bordering on what shylocks do.
In Kenya, CBK regulates only six deposit-taking microfinance institutions. The rest, about 45, are not policed. Kiiru and Zeija noted that less than 20 per cent of people who borrow loans from microfinance repay them from their business returns. Majority, over 62 percent, repay due to pressure from group members and similarly, about 17 per cent repay loans after selling their assets while about five per cent have their assets auctioned by group members. Association of Microfinance institutions in Kenya notes that their members serve over 6.5 million clients and they have advanced loans amounting to about $350 million (Sh29.4 billion).
SOURCE: Standard Media
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.
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.
By Lillian Nduati, Sunday Nation
Lending by microfinance organisations is pushing the poor deeper into the poverty, a new study says.
It also faults the widely held belief that microfinance targets the poor, saying the model is designed to cherry pick the lower class.
The study by the University of Nairobi economics lecturer Joy Kiiru in collaboration with similar research done in Uganda by Flavian Zeija dismisses the notion that lending small amounts normally co-secured by a group is “a positive poverty eradication tool and potentially powerful engine of growth for the economy.”
Instead, they say, the practice may be condemning millions to abject poverty.
“The social costs at which the repayments are made are too high,” Ms Kiiru says in her paper titled Microfinance and accountability to the poor: Do we have reason to worry?
The problem, the studies say, is lack of understanding by borrowers on what the loan contract entails and exploitation by microfinance of this ignorance.
“In fact, many clients only ask where to sign because they urgently need the money. Even those who can read and write do not bother to read the documents. They never question anything,” a Uganda microfinance credit officer is quoted saying in the report.
Multiple borrowing pushing the repayment beyond the borrower’s ability to repay has also been cited as major problem.
Multiple borrowing kicks in when a borrower has difficulty repaying a loan and borrows to avoid default.
The loan then balloons, and by the time the credit bubble bursts, the borrower will have nothing left when the group decides to sell the property for default.
In some instances, borrowers are forced to sell their household goods to repay loans, and as it recently happened in Makueni, others are forced to surrender their children to the group as a form of blackmail to bring in relatives to help repay the loan.
Hailed as the saviour to the poor, the microfinance model works in simple way – it gathers many low-income earners, gets them to form a group, and then loans them small amounts of money payable over flexible periods.
It supposedly works for the poor in that it does away with the need for the collateral needed to secure normal commercial loans.
The small loans are meant to help them set up income-generating projects to enable them to earn and pull themselves out of poverty.
Acceptance by a group is said to deter entry to those deep in poverty.
“Peers in a group will not allow very poor people to join them because the poor are likely to use their loans for consumption and therefore risk default,” said Ms Kiiru.
This is so because unlike the normal commercial loan given to an individual, a microfinance loan given to a group is jointly guaranteed by all members, and default by one member has consequences for the entire group.
“This finding implies that microfinance may be useful for the better-off poor, but it is simply not an option to the poorest,” she said.
The other problem cited is that the funds really poor people borrow are usually diverted to purposes other than what they were meant for.
The money is used to meet domestic needs like food, clothing, rent, and school fees with very little left over to invest in their small businesses.
The research showed that only 17 per cent were able to repay their loans from their business returns.
The majority, 62 per cent of borrowers, repaid their loans under duress – repayment due to excessive peer pressure.
Another 17 per cent had to sell their pre-existing assets, while four per cent had their property confiscated by their peers.
Then there is the question of insufficient loans, either because the borrower underestimated the money needed or simply that the lender declined to lend the amount requested.
The intended project ends up failing, and the borrower has to turn to the little she had to repay for failed business.
The two researchers argue that the oft-cited loan repayment rates of about 90 to 100 per cent – much higher than repayment rates at commercial banks – hide the blood, sweat and tears of microfinance borrowers.
And the fact that they are unregulated means the microfinance institutions operate under their own rules, and some border on being shylocks.
In Kenya, the Central Bank, in accordance with the MFI Act 2008, regulates only deposit-taking MFIs; the rest are not regulated. It has been left mainly to the MFIs to regulate themselves.
The Association of Microfinance Institutions-Kenya (AMFI-Kenya) is lobbying government to have a legal formal framework that will allow it (AMFI) to supervise, discipline and register MFIs.
This would protect consumers from fraudulent MFIs and unprofessional services, including undignified loan collection and debt recovery methods.
“Supervision and regulation – not control – are the key to bring some sense in the industry and warding off fraudulent MFI institutions,” said Jorum Ndung’u of Kadet, a local MFI.
By George Ngigi, Business Daily Africa
Newly licensed deposit taking micro-finance institutions are posing a fresh risk to the Deposit Protection Fund (DPF) as they increase the value of savings insured by the statutory body.
The Central Bank of Kenya (CBK) allowed licensed micro-finance institutions to take deposits last year in an effort to widen the reach of formal financial services in under-served areas.
The banking of small depositors in large numbers has, however, increased the exposure of the protection fund to larger claims as it is obligated to guarantee payment of up to a maximum of Sh100,000 per account.
“As we celebrate the deepening of financial access through initiatives such as agency banking and deposit taking microfinance institutions, no doubt this has continued to put pressure on deposit protection as the exposure to the DPF has increased exponentially,” said Rose Detho, director of the fund in the annual report for 2011.
There are four national deposit taking microfinance institutions in the country. Faulu Kenya and KWFT were members as of June 2011 with SMEP and Remu expected to join following CBK’s approval of their taking deposits from the public.
As at September last year, the deposit taking microfinance institutions had 1.52 million deposit accounts with Sh9.9 billion in savings. The banks’ deposit base also grew to Sh1.5 trillion in September, with 13.7 million deposit accounts.
All member institutions pay flat-rate contributions based on the level of deposits taken by the institution in the previous 12 months.
Currently, the annual premium is assessed at 0.15 per cent of the average total deposit liabilities or Sh300,000 per member, whichever is higher.
It is applied uniformly, with assessments carried out in July and premium payments made by August of each year. Late payments attract penalties.
Data from Central Bank shows the balance at the Depositors’ Protection Fund (DPF) stood at Sh26.94 billion in 2010 compared to protected deposits of Sh157,174 billion, leaving 83 per cent of depositors exposed. “We continue to bank on the continued growth of the fund, the resilience of our banking system and the vigilance of the supervisory authority,” said Ms Detho.
The exposure has led to debate on whether the insurance cover should be raised. “Insurance coverage is still very low in relation to the total exposure of the fund. Consequently, there is need to continue building the fund as well as ensuring that the financial system is sound,” said the fund.
The deposit mobilisation efforts of DTMs have further received a boost with the central bank allowing them to also engage agents, while the Finance ministry seeks to offer funds to the institutions to enhance their participation in rural areas.
Banks such as Equity, which has a high number of retail accounts, has a higher coverage ratio compared to corporate focused lenders like CFC Stanbic.
As at the end of 2010, Equity had Sh95.2 billion in deposits with 38.7 per cent (Sh36.9 billion) being insured while CFC had (2.6 per cent) Sh1.9 billion of its Sh72.7 billion deposits insured.
Equity has 5.2 million deposit account holders at whose account balances were below Sh100,000, while CFC Stanbic Bank has 51,714 .
The banking regulator’s financial stability report, which lists the risks facing the entire financial sector, says “one large bank” represented a large exposure to the Fund.
By John Oyuke, The Standard
Deposit Taking Microfinance Institutions can now use agents to provide financial services in an increased bid by the Government to promote financial inclusion to the unbanked and under-banked population.
This follows the commencement of new laws allowing the institutions to contract third parties to provide deposit taking microfinance business on their behalf.
The Guidelines issued by the Central Bank of Kenya (CBK) on the appointment and operations of third party agents by Deposit Taking Microfinance Institutions (DTMs) became effective on Monday.
CBK Director of Bank Supervision, Frederick Pere, said the agency model would extend the footprint of DTMs by allowing them to enter into strategic alliances with contracted third parties to provide specified deposit taking business on their behalf.
He said in a circular sent to all Chief Executive Officers of the institutions last month, the third parties to be contracted by DTMs would have to be approved by CBK and include both financial and non-financial entities.
Pere said the guidelines would among others ensure that the introduction of third parties in the DTM business would not compromise the safety, soundness and supervision of the DTM sector.
CBK first rolled out the agency model in the banking industry in 2010 as part of the initiatives to enhance access and penetration of cost effective financial services.
Since its launch, there has been remarkable growth in the use of this channel with CBK reporting it has up to date approved 8,937 agents to provide banking services on behalf of institutions licensed under the Banking Act.
According to CBK, through these agents, customers of banking institutions have undertaken 5.92 million transactions valued at Sh28.7 billion. He explained that CBK decided to extend the agency model to the microfinance sector following its notable success in the banking sector.
By Geoffrey Irungu Business Daily Africa
The Central Bank of Kenya has placed a high moral standard for businesses seeking to distribute financial products from deposit-taking microfinance institutions (DTMs).
The measures aimed at protecting customers will see the agents require references from the provincial administration, religious leaders and credit reference bureaus among other disclosures on behaviour and financial standing.
The Central Bank said the new guidelines would ensure that the agent “will not compromise safety, soundness and supervision of the DTM sector”.
The DTMs currently in operation include Faulu Kenya, Kenya Women Finance Trust, Uwezo and Small and Micro-Enterprise Programme.
The regulator said there were now nearly 9,000 agents for commercial banks who have handled it 5.92 million transactions valued at Sh28.7 billion.
“In order to enhance the inclusivity of the financial systems, the Central Bank is to extend the agency model to the microfinance sector.,” said a circular from Frederick Pere, the director of bank supervision. “The third parties to be contracted by the DTMs will be approved by the Central Bank of Kenya.”
The directive allows the institutions to appoint only the agents who have been running a commercial activity for at least a year and have a good credit record. The agent will also require secure premises and competent personnel.
According to the rules, the entities that will be eligible for appointment as agents include limited liability companies, sole proprietorship, partnerships, societies, co-operative societies, state corporations, trusts, public entities and any other entity which the Central Bank may prescribe.
Also to be provided are audited financial statements for corporate entities or certified financial affairs in the case of sole proprietors or partnerships for the past 12 months immediately preceding the date of suitability assessment.
Where it is a sole proprietor or a partnership, a certificate of good conduct or a letter of recommendation from the local chief, a registered religious leader or a regulated financial institution where the proposed agent holds an account.
Patrick Lumumba, a senior programmes officer at the Association of Microfinance Institutions, said many DTMs now have the option to convert their marketing offices and branches into agencies in line with the provisions.
“Some DTMs were opening high-tech banking offices or branches in order to increase their reach. They can now appoint new agents as well. We can say these rules have made things clearer,” said Mr Lumumba.
CBK first rolled out the agency model in the banking industry in 2010.
The rules say that a DTMs may require a director, shareholder, sole proprietor, partner, manager or any other officer or employee of an entity to be vetted if the vetting of that person is necessary for do the business.
“Prior to engaging an entity as an agent, an institution shall assess the moral, business and professional suitability of the sole proprietor or partners of an entity proposed to be appointed as an agent,” says the rules.