Bottom of the pyramid plan boosts revenues

With the current economic downturn, financial institutions are facing a challenging time in carrying out their intermediation roles. Profitability is being affected, non-performing loans growing, cost of operation rising and increasingly turning to government risk free securities to hedge against potential losses. How is Family Bank faring on these parameters?

Its true the current depressed economic time has affected businesses and as financial institutions what happens to the overall economy tend to affect as more as we are at the centre of economic wheel.

Given that agriculture contributes over two third of the country Gross Domestic Product (GDP), the current adverse effect due to failed rains in the last 3 seasons is ragging the whole economy down. When the rains are good the economy performs well as people have more disposable income to invest and increase consumption of capital goods.

At Family Bank our gross non-performing loans have gone down due to timely recovery and prudent lending. We intend to continue paying special attention to our loan books, especially now where distress is likely to grow. With rapid expansion comes increased cost of operation attributed to staff increase, capacity building and branch set up cost.

Our cost has been rising in tandem with our growth projection. In the past new branch break even point was achieved within three months.

However, with the current economic meltdown our break even point has been pushed to six months denying us the opportunity to realise return on our investment early enough. But we expect to return to our three months break even point once the economy picks up.

Whereas investing in government papers removes the potential risk of default, we are balancing between investing in these papers and lending to the private sector.

It’s important to note that investment in government Treasury bonds and bills is a “spot” investment realised from the auction. Allocation is determined by the bids placed hence its bound to be cyclic and what is captured in our report is the ‘spot’ investment.

Family Bank has recorded positive growth in loans and advances, deposit, and a decline in gross non-performing loans. However, despite these positive developments the bank recorded a drop in pre-tax profit by 33 per cent compared to June 2008. What are the contributing factors?

The growth in our loan book is an indication that we intend to continue to provide affordable credit to our clients in furtherance of their economic activities. It’s clear the trend in the banking industry is to slow down lending.

However, this can be counterproductive because it amounts to abandoning your clients when they need you most. Such an approach may lead to clients walking away.

We continue to lend though observing all prudent requirements to ensure we do not see a growth in our otherwise sterling performance of the NPL. Indeed, by closely monitoring our loan book we have the lowest delinquency rate of six per cent in an industry with an average of 40 per cent.

In terms of our drop on pretax profit, the last period we had the Safaricom IPO that allowed us to lend on short term. The transactional fees collected and the income from the loans were one –off returns which enabled us to perform well. The performance in the current period is positive when the one-off returns are excluded from last year first half year of operation.

Lastly, the slowdown in our key market segment has also affected our performance. Our main market target is agriculture and small and medium size enterprises (SMEs), which have been adversely affected by poor weather and inflationary pressure.