We want to protect our customers from default as their ability to repay loans has reduced. John Mwara, MD Faulu Kenya Deposit Taking Microfinance.
Borrowers from micro-finance institutions (MFIs) have escaped the recent surge in lending rates that have seen the cost of loans from commercial banks jump to over 24 per cent.
The MFIs—which are generally funded through concessionary loans from international development institutions— have been spared the high cost of funds that banks have suffered following successive interest rate increases by the Central Bank of Kenya.
This has enabled the MFIs to hold their lending rates at just below 20 per cent, affording their customers lower cost of loans than what the commercial banks are charging.
“We have not changed our interest rates,” said Mr Peter Muthendi, CEO of Kadet Microfinance whose lending rate averages about 19.5 per cent.
Unlike commercial banks which are dependent on customer deposits to grow their loan book, MFIs rely on concessionary lending, mainly from international financiers, for funds to lend to customers.
Banks have in the last six months raised their minimum lending rates from around 14 per cent to 24 per cent, taking cue from Central Bank’s benchmark rate increases.
Mr Muthendi said microfinance institutions had partnered with many wholesale financiers that lend to MFIs in dollar or euros, with an agreement on how to hedge against forex risk and protect the micro lenders from interest rate volatility in the local market.
Common lenders to the MFIs include Stromme foundation, Oikocredit, and Proparco.
Partnerships with social investors who are mostly interested in changing the welfare of the communities and not financial returns have also seen borrowers with the microfinance institutions continue servicing their loans at unchanged rates.
The Association of Microfinance Institutions states that the lenders have six million customers and a loan book of Sh66 billion. Faulu Kenya MD, John Mwara, said his firm, a deposit taking MFI, had not reviewed its lending rate.
“We also want to protect our customers from default. Their ability to repay loans has greatly reduced and their current minimal margins from their engagements cannot take extra cash commitment,” said Mr Mwara.
CBK’s interest rate increases have been aimed at stabilising the shilling and taming the inflation rate.
The shilling slumped to an all-time-low of 107 units to the dollar in October, while the inflation rate stood at 19.7 per cent as at the end of November.
Microfinance institutions mainly serve low income earners, who have borne the brunt of the recent surge in the cost of living.
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