The microfinance banks sector loan book shrunk to an eight-year low of Sh39.3 billion last year as the industry’s vulnerability to shocks remained elevated.
According to data from the Central Bank of Kenya (CBK) 2022 Financial Sector Stability Report, the sector’s net loans and advances fell by 1.95 percent in the year from Sh40.1 billion previously.
The apex bank said financial sub-sector remains weak and vulnerable to even the most-mild of shocks given their low level of key indicators.
The decline in lending by microfinance banks is partially attributable to competition from commercial banks and digital lenders.
“The subsector seems to have not gained from the economic recovery in 2022 as lending declined further with profit before tax, return on assets, and equity recording bigger losses,” said the CBK. The MFBs’ profits before tax deteriorated to a loss of Sh980 million from a narrower Sh722 million loss.
Only four micro-banks recorded profits in the period with the remainder of 10 MFBs recorded losses. The industry’s total deposits shrunk by 7.8 percent to Sh46.5 billion, impacting negatively on the micro-bank funding bases pushing the entities to borrowing as an alternative.
The decline has previously been traced to the transfer of funds to alternative attractive investments due to the overall increase in interest rates.
Customer deposits and borrowing were the main sources of funding for microfinance banks at 66 and 13 percent of the microfinance banks’ total funding sources.
“Narrowing fund base has a significant impact on the subsector’s ability to grow assets, which, in turn, raises stability concerns,” the CBK added.
“Slow growth in loans and profitability raises viability issues of MFBs, especially with new players targeting the low end of the market, especially digital credit providers as well as funding challenges that limit their capacity to lend.” Four microfinance banks failed to meet capital requirements while two did not meet minimum liquidity ratios.
Secondary CBK data shows there were four large microfinance banks by December 31, 2022, with a market share of 81.9 percent, seven medium microfinance banks with a 16.4 percent market share, and three small microfinance banks.
The MFBs vulnerabilities have triggered mergers and acquisition activities in the sector.
In January last year for instance, Branch International Limited which trades as Branch acquired an 84.89 percent shareholding of Century Microfinance Bank Limited.
LOLC Mauritius Holdings Limited-LOLC Mauritius meanwhile acquired 73 percent shareholding of Key Microfinance Bank Plc while Delaware-based UMBA Inc. acquired 66.06 percent shareholding of Daraja Microfinance Bank Limited in May 2022.
