Many MFIs like the KWFT have used either funds from donors or loans from other financial institutions to lend to their clients. Photo/ANTHONY KAMAU
Small scale borrowers are likely to get cheaper credit following the licensing of the second deposit-taking microfinance (DTM) institution — the Kenya Women Finance Trust.
The trust — which will assume the name Kenya Women Finance Trust Deposit Taking Microfinance Limited (KWFT DTM), joins Faulu Kenya which was licensed a year ago.
Another eight firms are waiting for similar licences.
The two institutions can leverage on the cheaper deposits from their customers, a development that should also lead to cheaper credit for the same customers.
KWFT DTM had to raise its borrowings by a massive 49 per cent or Sh1.1 billion to Sh3.3 billion in 2008 in order to continue giving out loans.
With access to cheaper deposits, the bank would probably borrowed much less.
Other financial institutions such as commercial banks have been collecting deposits for rates as low as 1.81 per cent as is the case for the average savings rate currently.
For fixed deposits, the average annual interest rate is 4.89 per cent.
The licensing of the two and other MFIs is critical to credit access for the micro-, small and medium enterprises (MSMEs) which are the largest employers but have traditionally been shut out of the credit market by mainstream financial institutions that have a bias for corporates.
The formal employment sector employs only about two million people while those in informal employment — excluding self-employed agriculture workers — account for about nine million.
KWFT, headed by Jennifer Riria, made a 140 per cent increase in profit of Sh545 million before tax in 2008 compared to Sh227 million in the previous year.
It could easily be one of the most profitable MFIs as it was the 17 largest amongst the 43 commercial banks operational as at the end of the year.
In that year, the 16th position was taken by Family Bank with Sh576 million profit before tax.
Shareholders’ funds
KWFT’s assets stood at Sh9.5 billion at the end of 2008 with revenues hitting Sh1.9 billion in the same year.
And with an asset base or shareholders’ funds at Sh1.794 billion, it would have ranked 18th among the 43 financial institutions operating by the end of 2008, thereby making it larger than most commercial banks.
KWFT has had to partner with many donors and financiers including UK’s Department for International Development, the Ford Foundation, Barclays Bank and Kenya Commercial Bank for financing because it had no access to cheap deposits.
Many MFIs have tended to use either funds from donors or loans from other financial institutions.
They sometimes have to pay expensively to obtain bank loans with the interest charged ranging between eight and 15 per cent.
The MFI then lends the money to customers at a margin of 10 to 15 per cent above the rate at which they borrowed the money — thereby costing the borrower a massive 25 to 30 per cent annual interest rate.
This is compared to the base lending rate of 15 per cent in commercial banks with a mark-up of three to five per cent above this.
A microfinance institution (MFI) begins to take deposits on a nationwide scale when it has fulfilled conditions such as capital of a minimum of Sh60 million, a proper ICT platform, adequate liquidity as well as managerial capabilities.
Faulu Kenya, headed by Lydia Koros, has introduced several savings products since being licensed to take deposits last year, with some as low as Sh200 for opening and operating balance.
Records show that the company made Sh104 million before tax in 2007 compared to Sh75 million the previous year.
The Central Bank of Kenya said the licensing of KWFT DTM marked a major milestone in the microfinance sector and the financial sector at large.
“In particular, it is a major achievement for the women of Kenya given that KWFT DTM currently provides credit to over 334,000 women clients,” said CBK governor Njuguna Ndung’u in a press statement.
Depositors protected
The transformation will enable KWFT DTM to diversify its product range and offer savings products to its clients in addition to loans.
Since the Microfinance Act and its attendant regulations came into effect on May 2, 2008, CBK has approved 34 business names for MFIs, which is the first step in the licensing process.
In addition to the two licensed firms, one applicant has been issued with a letter of intent meaning approval pending fulfilling all requisite conditions. Another seven applications are at various stages of review and appraisal by the CBK.
Prof Ndung’u said: “Regulation of the microfinance sector brings with it the overarching benefit of instilling public confidence in microfinance institutions. This is a necessary prerequisite for moving the microfinance sector to new frontiers of financial reach through mobilisation and intermediation of public deposits.”
Depositors are protected by the Deposit Protection Fund Board (DPFB) up to the tune of Sh100,000 — which is intended to be a safety net to enhance customer confidence in licensed DTMs.
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