MFIs fill banking void as new laws provide more market flexibility

The last few years have seen a steady expansion of micro-finance institutions since 2006.

Figures contained in FinAcess 2009, a report on credit access released by the Central Bank and other partners— shows that the market share of MFIs and Saccos jumped from 7.5 per cent three years ago to nearly 20 per cent at the end of last year.

The growth has been attributed to MFIs rising to fill void left mainstream banks especially among the low income segment of the society.

The report also says credit access to this segment from the formal sector has been constrained by tedious requirements in accessing financial services, high fees in existing financial services, lack of trust in banks, limited income, and illiteracy, among other factors.

“There has always been a considerable demand for credit but most low-income investors and consumers have found formal financial service providers’ requirements hard to meet,” the report says.

MFIs on the other hand have embraced this segment by a suit-your-needs approach that does away with needs for a proven credit history before lending out to clients and collateral.

Service uptake
The uptake of micro finance services is expected to expand with the enactment of a micro-finance law last year that empowers the Central Bank to license, regulate, and supervise any deposit-taking micro-finance institutions.

Their inclusion in the deposit insurance scheme, Deposit Protection Fund Board, is also expected to increase the level of public confidence.

Last week, Faulu Kenya became the first micro-finance institution in the country to start taking deposits from the public.

It is expected to be soon followed by the Kenya Women Finance Trust.

Previously, MFIs only offered credit services.

The deposits are set to provide MFIs with low cost funds for lending at affordable rates unlike in the past when they relied on expensive lines of credit or significant capital reserves from which to lend.

In effect, they will reduce their reliance on intermediate funding from banks loans and/or donors.

This relative financial self sustainability will enable them to charge lower interest rates and thus encourage more borrowing from clients.

According to Mr Kinyumu, a managing consultant at Credit Partners Ltd, the licensing will lead to the MFIs eating into a chunk of banks’ market share.