Microfinance banks charge high interest despite taking deposits

The interest rate charged by microfinance banks (MFBs) has remained high five years after the lenders were allowed to collect deposits from the public to help lower the cost of funds.

Data from the Central Bank of Kenya (CBK) shows that micro-lenders were on average charging 22.6 per cent on loans compared to 16 per cent by banks.

“MFBs overall interest rates remain above those of commercial banks” said CBK. The micro lenders, however, reward those who save with them better with an average deposit rate at 9.7 per cent compared to 6.8 paid by banks for fixed deposits.

The high interest rates allow microfinance banks to enjoy higher interest spreads than banks. The difference between the price at which MFBs were loaning out cash and what they were paying for the money was 12.8 per cent compared to 9.2 per cent enjoyed by banks.

Kenya has nine microfinance banks whose licensing started in 2010.

The microfinances were allowed to start collecting deposits to cut financing costs and hopefully lend at lower rates to borrowers who are mainly at the bottom of the pyramid.

The borrowers often do not have collateral or bank statements.

Given their short operating history and perceived higher risk, microfinance banks have been offering high deposit rates to attract new savings, a factor which has curtailed efforts to reduce lending rates.

New branches

As at September last year, MFBs had a deposit base of Sh33.2 billion up from Sh30.7 billion three months earlier.

In the three months between September and June they had opened more than 100,000 new deposit accounts, raising the number to 2,195,289.

Their long term borrowing decreased to Sh4.9 billion in September from Sh5.5 billion in June, indicating increased reliance on deposits as a source of funding for customer loans. The micro-lenders had issued loans worth Sh37.6 billion through 424,914 loan accounts.

The high capital investment required to convert to a deposit taking microfinance institution has however kept most micro lenders from taking up opportunities created by the new business line.

Most MFBs which take deposits have recorded declining profits due to higher operating costs. These include infrastructural investment in new branches which comply with CBK’s security measures, more qualified staff and re-branding costs.

Some of the licensed MFBs include Faulu Kenya, recently majority acquired by Old Mutual, Kenya Women Finance Trust, Remu and Smep.