Kenya: Micro-lenders face tough odds as they battle banks to win customer loyalty

By George Ngigi, Business daily Africa

Rafiki DTM operates from the building that housed Odeon Cinema on Nairobi’s Tom Mboya Street. In the night, its blue colour neon-sign stands out while in the day, customers walk to the third floor for transactions.

Rafiki, a subsidiary wholly-owned by Chase Bank, is one of the deposit taking microfinance (DTM) institutions that have taken the lower segment of the banking sector, targeting mid- and small-sized entrepreneurs.
Competition and realisation that the economy is no longer being driven by the corporate giants, has made banks change tack to look for the little known business person.

Banks are embracing the jua kali (informal business) sector including the mama mboga, touts, and even hand-cart pushers.

In its latest survey Central Bank noted that the microfinance sector was attracting admiration from commercial banks with a number of institutions having either down-scaled their products or were setting up subsidiaries to get part of the microfinance business.

KCB, Equity Bank, Family Bank, K-Rep, and Co-op Bank are among those providing loans as low as Sh5,000 and now have agents in rural areas previously left to the microfinance institutions (MFIs).

“Chase Bank has built a brand as a corporate bank and we did not want to dilute that brand while entering this market,” said Daniel Mavindu, the CEO of Rafiki DTM, while explaining the concept of the subsidiary.

The MFIs have evolved over time from charity-based social and financial empowerment programmes that are part of financial inclusion plans.

“As competition picks up, banks will adopt different competitive strategies. Because the micro-market is under-served the natural competitive evolution will be to see more banks attacking the market segment with suitable products,” said Habil Olaka, the CEO of Kenya Bankers Association.

“To succeed, commercial banks are using specialised units or stand-alone subsidiaries in view of the fact the skills required for appraising micro-loans are different from the ordinary commercial banking products,” said Mr Olaka

Micro lenders are betting on size to reach more remote regions to take on the big operators.

“The MFIs have spent all their lifetime serving this category hence they are ahead in terms of relevant structures that are a pre-requisite,” said John Mwara, the managing director of Faulu Kenya.

To remain sustainable, Mr Mwara said the niche had to be more efficient to get noticed among the wealthier commercial banks whose asset bases allow them to diversify product portfolio.

The Association of Micro-finance Institutions (AMFI) CEO Benjamin Nkungi says the micro-financiers need to redefine themselves by becoming more innovative and aggressive in customer service.

“MFIs have had the culture of going out to the client through field officers while banks are used to having clients visiting them in the branches. So if we continue doing what we do, the line will be clear,” said Mr Nkungi.

Reports on financial inclusion have shown that the lower-end market has diverse needs, making innovation a key factor in customer service for this segment.

MFIs work as a group where individual members come together to guarantee each other when seeking credit, eliminating the need for the conventional collaterals like title deeds and motor vehicle logbooks. Some of these are beyond the reach of many.

Equity Bank has started developing this structure in disbursing loans, especially those targeting women.

Though it is safe to the micro-lender due to peer pressure, the group methodology has also been viewed as a limiting factor as borrowers who grow faster than the group are stalled by their peers.

Banks have been waiting in the wings for such individuals who, in one way or another, have overgrown the micro institutions.

“Some of the people we support in micro will grow and have a bank ready to accommodate them,” Mr Mavindu said.

It is also true that when entrepreneurs grow, they are more willing to deposit with the commercial banks, which is a double loss for the MFIs.

“The big depositors would prefer the banks as there are services which MFIs do not offer due to legal restrictions and we are not saying we want to offer them as we may as well convert to banks,” said Mr Nkungi.

Some of the services that the deposit-taking micro-finance institutions do not offer include current account, cash transfer services and foreign currency trading.

Many MFIs borrow from banks at the market interest rates to loan out to their members, forcing them to charge higher rates so as to remain afloat while limiting the amount. Moreover banks have been able to cut their operating costs by installing IT systems while the MFIs, being more labour intensive, are unable to take advantage of technology.

Because of these factors, the micro-lenders charge higher interest rates than the banks. MFIs have not taken themselves as profit-driven but social enterprises serving the poor. This mission and the tightening of sector regulations have attracted global partners.

Cheaper funds

“With the improvement of their books, institutions are attracting social investors who provide funds for a specific target at a lower rate,” said Mr Nkungi.

Deposit-taking MFIs targeted reducing cost of accessing funds by the institutions which had for long relied on credit from banking institutions to loan their clients.

Though it is a source of cheaper funds, converting to deposit taking has been slower than expected partly because of high inception costs, regulations of ownership which limit a single shareholder to 25 per cent stake while others took a wait-and-see stance to see how pioneers do it.

“The pioneers were extravagant as they have ambitions and expectations as initiators and it was a learning process for both the regulator and the industry but as soon as they report progress others will come on board,” said Mr Nkungi.

Faulu Kenya was the first to convert to deposit taking in 2008 and though the initial pressure pushed them to losses of Sh130 million by end of year 2010 the number of their deposit accounts grew by 95 per cent to 343,650 from 176,353 with a deposit base of Sh1.9 billion from Sh82 million in December 2009, creating a silver lining.

Transformational costs include installation of IT platforms for generating daily reports as required by the regulator, cash handling training, and installation of security features.

Challenges

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

Rafiki DTM is facing the challenges head-on. “We have a solid experience in banking and we knew what we wanted so we were able to put in place all the necessary structures unlike others who had no experience in banking for example in cash handling,” said Mr Mavindu.

The penetration strategy of Rafiki DTM emphasises the gap in financial strength between the two classes of financial institutions.
The higher risk associated with micro lenders owing to the literacy levels of clients and lack of collateral has seen the regulator put more checks on the micro-financiers.

“DTMs provide 100 per cent for any loan after 180 days while banks have 365 days forcing DTMs to be more aggressive in collecting debt,” said Mr Nkungi.

He hails the regulation by Central Bank on deposit-taking micro finances urging that the regulatory environment be deepened to include credit-only micro-finances as lax supervision creates room for cons. The CBK issues two licences: one for nationwide operators and community institutions that are limited to divisions.

Though the leeway provided for small MFIs especially Saccos to seek cash from the public as community DTMs, they have opted to use the required capital of Sh20 million for on-lending as the economies of scale work against this platform and favour nationwide platform whose minimum capital is Sh60 million.

The association of microfinance institutions has 56 institutions, six million customers, and a loan book of Sh66 billion.

However some in the association are banking institutions such as Equity, K-Rep, Jamii Bora and Co-op Bank, underlining the banks’ desire to be associated with the micro-lenders.

gngigi@ke.nationmedia.com