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Micro-lender gets approval to start taking deposits
Faulu and KWFT were the first MFIs licensed to take deposits from members. File
The Central Bank has allowed Uwezo, a microfinance institution, to start taking deposits, making it the third such institution to get the licence.
It is joining Faulu and Kenya Women Finance Trust, which got deposit permits in May 2009 and April 2010 respectively. Uwezo will take deposits from a restricted region — Starehe division in Nairobi.
The law requires different capital levels depending on reach. The minimum core capital requirement for nationwide and community deposit-takers is Sh60 million and Sh20 million in that order.
Interest rates
“While a nationwide DTM (deposit-taking institution) may establish operations in any part of the country, those of a community DTM are restricted as prescribed by law,” read a part of a statement from the Central Bank.
A community-based institution “is mainly focused on a target market that seeks accessible and efficient financial services.”
By taking deposits, the micro lenders will be able to reduce their cost of operations which can in turn lead to lower lending rates.
According to a recent study by Financial Sector Deepening (FSD), about 90 per cent of MFIs depend on debt funding from domestic and international sources.
This has made them charge interest rates higher than banks as they seek to repay the debts while maintaining profit margins in the business of lending to the bottom of the pyramid.
Despite their high interest rates, MFIs have remained the most preferred source of credit after friends and family, a fact analysts attribute to flexibility and superb customer service.
MFIs are expected to play a more active role in grassroots finance with the creation of 47 counties that will receive substantial revenue allocations from the central government.
CBK said the first two deposit-taking micro-lenders had deposits amounting to Sh7.3 billion and a loan portfolio of Sh14.8 billion by September. The two have a combined 597,633 active deposit accounts.
“The Central Bank of Kenya will continue to reform policy and regulation with the aim of enhancing the level of financial inclusion in Kenya,” the regulator said, adding that it is reviewing guidelines to incorporate DTMs in the recently launched credit information sharing plan.
Banks have started sharing information on loan repayments, a move that is expect to significantly cut down on defaults and reduce the level of loan loss provisions, which will free more cash for lending.
Managing risk
However, MFIs face the challenge of managing lending risk given the inherent exposure to low income borrowers who have thin assets to secure debt.
The regulator also announced plans to allow DTMs to venture into agency banking using technology-based platforms, a move that would further boost access to financial services in the rural areas. Most MFIs are concentrated in Nairobi.
