Kenya: Central Bank licenses new deposit-taking microfinance

By George Ngigi, Business Daily Africa

The Central Bank of Kenya (CBK) has licensed a new micro-finance institution to collect deposits from the public as it seeks to make financial services accessible to more people.

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.

Tough conditions

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.

Kenya: MFIs to soon operate current accounts

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.

Kenya: Deposit-takers set to use agency models

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.

Kenya: Noose tightens on loan defaulters

By John Oyuke, Standard Media

The Central Bank of Kenya (CBK) is working on ways to rope in all financial institutions into the Credit Information Sharing (CIS) system in order to widen the net for credit reference check.

The mechanism, that will make it difficult for loan defaulters to access credit facilities, is already in place for commercial banks.

The bank’s governor Prof Njuguna Ndung’u said work on the modalities of incorporating Deposit Taking Microfinance Institutions (DTMI) into the new mechanism is in progress.

He said the system will help the Government create a framework where all financial institutions would have access to and exchange credit information across the board.

Banks, DTMIs, Savings and Credit Co-operative Societies (Saccos) and other licensed credit providers would all be incorporated into the system and start sharing credit information with each other.

“It is hoped merging of credit information from these various players will help provide a stronger credit market,” said the governor.

According to Ndung’u this would improve the pool of credible borrowers, decrease defaults, reduce credit costs and ultimately result in a stable financial sector.

CBK has already tightened the vetting process for loan applications in a bid to lower risk and subsequently help bring down interest rates charged by commercial banks.

It has already licensed credit reference bureaus to collect information on customers’ loan repayment history.

Dishonoured cheques

The bank has also instructed commercial banks to provide information on their customers, including records of dishonoured cheques, compulsory closure of accounts and late payments or credit defaults on all types of facilities.

Lenders are also required to share information on non-performing loans, false declarations and statements, receiverships, bankruptcies and liquidations.

Although the new plans are not meant to block potential borrowers with bad records from accessing credit facilities, it will guide banks to decide when and how to lend such people money, ordinarily under conditions that are expected to be more stringent compared to that reserved for customers with higher credit scores.

Central Bank believes this will help reduce incidents of non-performing loans and possibly save Kenyans from the high interest rates currently being charged by commercial banks.

The first credit bureau was licensed by CBK early last year after several years of deliberations between the Kenya Bankers Association (KBA), CBK, the Ministry of Finance and the office of the Attorney General.