Treasury steps in to cushion deposit-taking institutions

Treasury has come to the rescue of deposit-taking microfinance institutions (DTMs) with a multi-billion shilling credit facility to boost their lending and upgrade their technology.

The institutions will receive low-cost loans for onward lending to poor households and cash to open new branches and upgrade their IT systems to facilitate processing of reports as required by the regulator. The funds will also cater for increased staff costs.

Restructuring costs and higher regulatory expenses have slowed down the earnings of newly licensed deposit-taking micro finance institutions like Faulu Kenya and Kenya Women Finance Trust (KWFT). For this reason Treasury is seeking to support the micro-lenders from a Sh7.16 billion credit facility created with the help of the International Fund of Agricultural Development (IFAD).

“The main objective of the credit facility is to address the short-term capital constraints of DTMs and help them establish sustainable deposit mobilisation for their long-term growth,” said Treasury in a notice.

It added that the low-cost credit facility will also help roll back poverty in rural Kenya as the micro-lenders step up lending to households that commercial banks won’t give loans.

The loans will be offered to the six deposit taking micro-lenders at interest rates of between eight and 10 per cent—which is lower than the 15 per cent that banks are currently paying for wholesale deposits.

The six beneficiaries include Kenya Women Finance Trust Limited (KWFT), Faulu Kenya, Small and Micro Enterprise Programme (SMEP), Uwezo, Remu and Rafiki.

The Central Bank of Kenya begun issuing micro-lenders with deposit taking licences from April 2010—to provide them with cheap funds for onward lending, especially to high risk poor households. Previously, they were restricted to lending and relied on other financiers to support their loan books.

The costs incurred in transforming to deposit-taking lenders were estimated at over Sh500 million, an amount comprised mainly of branch set-up costs, core banking system upgrade and increased staff costs.

They had to tap professionals from the banking sector to help them manage deposit-taking and further train their staff on the risk associated with cash handling.

But the deposits mobilised have not been sufficient to stop the micro-lenders’ reliance on expensive external funds, which have limited their lending, forcing Treasury and IFAD to intervene.

“Some of the obstacles that we have been facing include the high cost of setting up infrastructure that meet regulatory standards as well as the high cost of operation in remote areas,” Mwangi Githaiga, KWFT managing director.