Micro-lenders lose Sh1bn in one year


Faulu Microfinance bank in Nyeri. FILE PHOTO | NMG

Kenya's micro-lenders suffered a Sh1 billion loss in 12 months to June, a 30 percent decline from a Sh0.7 billion last year, a Central Bank of Kenya (CBK) report shows.

The 14 micro-finance banks (MFBs), which operate in the regulated space, have been on a loss-making streak since 2015, suffering from high default rates and competition from digital lenders.

The small lenders target loans to the ‘bottom of pyramid’, made up of the people most financially affected by the Coronavirus pandemic, making it difficult for their customers to meet repayments against high cost of operations.

Genghis Capital Research Analyst Gerald Muriuki said following the trend in the banking sector that has seen higher provisioning for dud loans it was expected that the MFBs will also take a huge hit.

“The large banks take up 80 to 90 per cent of the profits, and the smaller banks share the smaller portion of the profits which leaves the MFB’s with a very small segment. From the trends that have seen higher provisioning it was expected that they could take a loss,” Muriuki said.

Kenya has three large MFB’s including Kenya Women, Faulu and Rafiki, three mid-sized one including Caritas, Sumac and SMEP and smaller ones like Key, Uwezo, Maisha, Century, U&I, Daraja and Choice. Muungano, the new entrant, was registered in October last year.

The micro finance banks have been facing challenges including the increased credit risk which has contributed to increasing the number of non-performing loans, reduced reliance on deposits and increased reliance on more expensive borrowed funds.

They took a heavy hit on the interest rates cap especially since such lenders had previously leveraged on high interest rates to make up for their risky portfolios.

The industry challenges continued to mount with core capital to risk weighted assets ratio decreasing from 15 percent in June 2019 to 14 percent in June 2020 just two percentage points above CBK threshold.

The risk were however outweighed by an 8.6 percent increase in customer deposits to Sh46.8 billion in June 2020.

The coronavirus pandemic has hit the financial sectors hard with loan defaults due to job losses and slump in sectors of the economy like hospitality and tourism.

Banks have taken a hit on profits due to costs of defaulted loans that hit 13.6 percent in August and have been forced to restructure Sh1.12 trillion or 38 percent of the total banking sector loan book of Sh2.9 trillion.

Profitability in the banking sector took a hit, declining 17.2 percent to Sh134.1 billion in profit before tax in the year ended June 30, 2020, driven by 11.9 percent increase in expenses to Sh404.1 billion in June 2020 due to a 150.8 percent increase in bad debt charge.

Unlike banks, MFBs have a lower capacity to absorb huge losses or restructure loans.

Most MFPs have small balance sheets therefore are not systemically important but in critically vital to a large and vulnerable client base.