Kenya: Banks "Poaching" on Microfinanciers’ Turf as Battle for Small Savers Inte...

Feb 2009
Nairobi, Kenya, February, 04 2009 - A muted but nevertheless intense struggle is going on between giant banks and microfinance institutions over the low-profile credit market represented by the millions of low-income Kenyans who have jointly pooled savings amounting to an estimated Sh10 billion.

There are in the country an estimated 100,000 groups of small business operators, jua kali artisans, local women and youth groups who have painstakingly organised themselves and saved cash over the years.

Traditionally, these groups have had little to do with banks, relying on trust and unwritten codes to pool cash and offer members an occasional loan.

Microfinance institutions have nurtured many of these groups over the past two decades and have come to believe that this segment of the credit market is reserved for them.

But lately, major commercial banks have been wooing the best performers in this sector with offers of credit at easier, longer and more consumer-friendly terms.

“Banks are able to identify the very best clients of the MFIs, whom they then proceed to poach,” said the chief executive of the Association of Microfinance Institutions, Benjamin Nkungi.

MFIs are understandably unhappy.

“The banks have been taking some of our clients mainly because they are big and can afford to offer loans without security” said Winfred Manda, an accountant with Value Plus Ltd, a sister company of Crossbridge Credit Ltd.

She says that, while the banks have been progressively relaxing the tough lending conditions they traditionally adopted, MFIs continue to be tight with their cash and ultra-careful about lending to legions of defaulters.

This caution is understandable; for instance, defaulters forced Crossbridge to stop issuing personal loans in 2006. Ms Manda says the firm will be resuming lending later this year — but with more caution.

On their part, banks say they have been operating above board and see nothing wrong with their entry into the small savers’ credit market.

“What do they want us to do?” asked Rebecca Gakuru, public relations manager at National Bank of Kenya. “Banking is about competition, and the clients moving from MFIs to banks have their reasons for doing so. What the MFIs need to do is to style up.”

The thinking among MFIs is rather different — they argue that nurtured, indeed spoon-fed small and micro enterprises at a time when giant banks would not touch them.

“This segment of the country’s credit market should be reserved for MFIs,” says Peter Njoroge Karanja, executive director of the Kenya Federation of Self Help Associations (KEFESA).

Mr Karanja fears that the onslaught of banks on their market will drive MFIs out of business, particularly because banks are now loaning cash to both MFIs as well as their clients.

With its head office in Nakuru, KEFESA is a relatively new body representing thousands of self-help groups.

While it has so far adopted a low-key approach to advocacy for the interests of low-income groups, Mr Karanja says it soon hopes to be operating its own credit reference bureau to monitor members’ loans repayment record and make information available to banks, MFIs and other lenders on the creditworthiness of member groups.

But this may yet prove a self-defeating strategy.

Some commercial banks appear to have been capitalising on the “insider” information they acquire as bankers of self-help groups, Saccos, CBOs and even merry go rounds.

“Banks have access to groups’ savings portfolio and use the information to determine the most bankable of the groups,” lamented Mr Karanja. However, Ms Gakuru flatly denied this; “I do not think any bank would do that,” she said.

As their operations stand today, MFIs do not have much room to manoeuvre.

They have to borrow most of their cash from the same banks and have to add a mark-up, making their loans necessarily more expensive than what banks offer. In addition, the amounts they offer are generally low, averaging Sh150,000.

Besides, banks are also able to offer credit on relatively easier terms and, depending on the nature of the loan, may offer repayment periods of up to 48 months.

But most importantly, they do not put what is seen as “undue stress” on the groups. “Banks do not have as many requirements like MFIs,” said Ms Manda. Moreover, MFIs require groups owing them cash to meet every week so they can collect weekly loan repayment instalments while ensuring that their cash is still safe.

“At stake here is an estimated Sh10 billion savings portfolio that the groups have built up over the years,” says Mr Karanja.

This portfolio got a boost of sorts when the government initiated the Youth Enterprise Fund and the Women Enterprise Fund, each of which now has an annual kitty of Sh1 billion.

“The biggest dilemma facing many of the groups is whether to stick with the MFIs who have been like mothers to them or to go for the credit inducements offered by banks,” said Mr Karanja.

KEFESA, he says, supports the continuation of the long-running business relationships between self-help groups and the MFIs.

“We do not think the ongoing enticement of self-help groups by banks is healthy, because they do not know the problems we have gone through.” Mr Karanja is also of the opinion that many of the MFIs have come of age and ought to be licensed by the Central Bank to operate banking services.

In some respects, the Microfinance Act, 2006 has already created a legal basis for the transformation of MFIs into deposit-keeping institutions.

“With this law in place, MFIs will offer banks competition on a level playing field,” said Mr Nkungi. whose 42-member outfit draws its membership not just from MFIs, but also from banks.

He says that Barclays, Equity, K-Rep and Co-operative Bank as well as insurance companies are members of the AMFI.

Mr Nkungi asserts that competition between banks and MFIs will be healthy “if properly done and when none undermines the other.”

He agreed that the banks have been “poaching” the best clients of MFIs.

“The banks not only keep our cash but also our clients’ cash, so they are able to identify the good clients of MFIs — whom they have been poaching by advancing loans against their deposits. So, right now, MFIs are losing, but starting from April 30, MFIs will be legally empowered to collect deposits and manage their own accounts.”

That banks have entered the turf of MFIs is underscored by the fact that many have gone rural following what is now referred to as the “Equity revolution” — sparked by Equity Bank allowing potential clients to open accounts with zero balance.

Thereafter, a lot of other banks have taken the cue and begun offering no-collateral loans of as low as Sh50,000. Mr Nkungi says that, in effect, the banks have adopted the MFI modus operandi

“This is a normal transition, the clients in question cannot stay with MFIs for ever” said Ms Gakuru. She also argued that the movement of groups from MFIs to banks is a sign of growth in the national economy. “What MFIs should be doing is acquiring new clients.”

Up to 100 per cent of savings groups and SMEs’ deposits are currently held by banks, who reportedly offer them 2.5 per cent to 6 per cent interest on the deposits then lend out the money at between 11 per cent and 12.5 per cent per annum (depending on the type of loan).

Insiders says the effective lending rate could be much more because of hidden charges fees and charges that are usually not put down in the loan agreements.

The Act has already enabled the Kenya Women Finance Trust (KFWT) to be allowed to take deposits by the Central Bank, making it the first microfinance institution to benefit from the provisions of the Act.

Besides this, Faulu Kenya has also been given a provisional license.

In the course of this year alone, 12 MFIs are likely to get similar licences once they comply with the relevant regulations.

Besides being allowed to accept deposits, the MFIs will be allowed to access funds from different sources and can even bid for equity capital. But they will have to meet quite stringent conditions including retaining between Sh20 million and Sh60 million as core capital.

It has been a long struggle. Mr Nkungi recalled, “When we approached the government eight years ago with the idea of a regulatory statute, they said we were too small and did not want to deal with us.”

He said it was only former Central Bank governor Michah Cheserem who recognised the impact that MFIs were having on national development and, realising the dangers of their operating outside the law, helped them with the initial stages of drafting the Act.

Source : The East African

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