Kenya: Microfinance Banks (MFBs) Face a Tough Operating Environment After Their ...

Jan 2019
Kenya, January, 08 2019 - A new report by the Central Bank of Kenya (CBK) shows that the 13 MFBs saw their pre-tax losses increase five times to Sh935 million by end of June 2018, compared to a loss of Sh171 million in June 2017.

This stretches the loss-making streak by the microlenders to three consecutive years, bringing into question the profitability of financial sub-sector which not long ago was hailed as a panacea for financial exclusion.

Though the reason for this hemorrhage is not yet clear, experts have attributed it to the increase in the number of mobile lending platforms. These have eaten into MFBs customer base including the informal sector. Also, two critical ratios used as a barometer for banks’ stability declined in what CBK attributed to a decline in MFBs core capital - the minimum capital e.g. in savings banks are legally required to maintain- and total capital.

The MFBs’ core capital to risk-weighted assets ratio decreased from 20 per cent in June 2017 to 18 per cent in June 2018, which was above the minimum requirement of 10 per cent. 

Similarly, the ratio of total capital to total risk weighted assets or capital adequacy ratio, decreased from 23 per cent as at June 2017 to 19 per cent in June 2018, against minimum statutory requirement of 12 per cent.

“The decrease in the two capital ratios was as a result of the decrease in core capital as well as total capital by 8.5 per cent and 12.4 per cent respectively as a result of 447 percent increase in losses, which eroded the capital base,” said CBK in its latest financial report. Micro-lenders, which had been doing well among rural households and players in the informal sector who had been locked out of the official banking system, also saw their loan books shrink marginally to Sh46.1 billion by the end of June 2018, from Sh46.8 billion in the same period in 2017.

Their savings also declined by six per cent to Sh38.6 billion in the period under review compared to Sh40.7 billion. A tough business environment also saw these micro-lenders reduce agents by 228 during the period under review.

Interest rates

The regulator attributed this to ‘inability to mobilise financial resources and relocation of businesses.’ Unlike commercial banks, deposit-taking microfinance institutions have not been affected by the capping of the interest rate on loans.

They still operate under the Microfinance Act, not the Banking Act. However, most banks have also come up with mobile-lending apps targeting households and small and medium-sized enterprises in addition to digital lenders such as Branch and Tala.

Source : Standard Digital

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