Ms Lydia Koros (left), Faulu Kenya managing director, and Ms Dorothy Hamachi Berry, vice president IFC, after signing the Sh450 million deal. /William Oeri
Faulu Kenya has borrowed money locally to boost its expansion plans, months after it was given the green light to start taking deposits.
The microfinance institution on Monday received a Sh450 million loan from Standard Chartered Bank, Kenya which will be guaranteed by the World Bank private lending affiliate International Finance Corporation.
This gives Faulu the financial muscle to increase the amount of lending to its customers, expand the branch network and develop its infrastructure to penetrate the unbanked population.
Higher rates “The money could not have come at a better time,” said Ms Lydia Koros, Faulu Kenya’s managing director. “The funds will facilitate the ambitious expansion growth anticipated by Faulu.”
In June 2009, Faulu Kenya was given a go ahead by the Central Bank of Kenya to accept deposits from its customers. It became the first micro-finance institution (MFI) to be licensed as a deposit-taking institution.
This means that the MFI can now lend from customers deposits instead of relying on loans from international and local lenders which subjected customers to a higher interest rate.
Though, it remains to be seen whether the move to take deposits will translate to a reduction in interest rates of the loans from MFI’s. While the commercial banks charge interest rates of between 15 and 18 per cent, according to a CBK survey, MFIs charge a higher rate of not less than 20 per cent.
With Faulu Kenya turning to StanChart, it highlights the reliance on MFI’s to raise funds from local institutions to meet their working capital requirements and reduce reliance on international high-net worth investors whose credit lines is thinning in the global economic crisis.
“We are continuously exploring ways of opening up financial services to this sector (MFI) as we strongly believe that this sector is the engine for economic growth,” said Mr Richard Etemesi, Standard Chartered Bank, Kenya CEO.
The MFI sector has been lauded as an avenue with which to propel the growth of the economy especially in the rural areas for low income earners.
However, access to the financial services still remains low with about 33 per cent of the population left in the cold, according to a recent survey by Financial Sector Deepening (FSD) Kenya.
This leaves a gap in the provision of financial services to the sector especially in the rural areas where the commercial banks have not spread their wings.
“Promoting a strong financial system is essential for sustainable economic development,” said Ms Dorothy Berry, IFC vice president for Human Resources, Communications and Administration.
This is not the first time Faulu is raising money for purposes of expansion. In 2005, it raised Sh500 million through a corporate bond that got listed at the Nairobi Stock Exchange.
In late 2002, long before the bond was floated, Faulu’s board decided to shift portfolio funding from short-term to long-term capital with a view to stabilising cash flows and match maturities to liabilities.
It was several years later when it went directly to the capital markets with a five-year bond which was guaranteed up to 75 per cent by Agence Française de Dévéloppement (AfD) (French Development Agency). The technical team was led by Stanbic Bank Kenya Limited and its parent, the Standard Bank of South Africa to arrange the corporate bond.
Faulu Kenya initially started off in 1992 as a pilot micro-lending programme of Food for the Hungry International (FHI), an international NGO engaged in relief and development throughout the world, said a former CEO Mr Gerald Macharia in an Internet article.
This pilot programme was expanded and upscaled in 1995 with significant funding from United States Agency for International Development (USAID) and UK’s Department for International Development (DfID) and by 1998 had registered significant growth.
Said Mr Macharia: “FHI, not being a microfinance-oriented NGO, sought to free Faulu Kenya and have it operate at arms length. Therefore, in 1999, Faulu Kenya Limited was incorporated as a private capital share company owned by FHI. It has operated profitably since its incorporation.”
He said that this allowed Faulu Kenya to start sourcing commercial funding towards its portfolio growth with an initial subsidised loan of $145,000 from a local European Union supported programme in 2000.
He says this was followed by another $500,000 from the same programme in 2001, and two commercial banks provided credit lines worth $4 million in 2002, “leveraged against existing assets with some backing from one international guarantee.”
In 2003, this was supplemented by an 18-month hard currency term loan from Blue Orchard’s Dexia Micro finance Fund, amounting to $450,000. The loan was intended to be a tentative step towards balance sheet-based borrowing as it was based on a promissory notes issued on the strength of Faulu Kenya’s balance sheet.
“These borrowing experiences spread over a four year period formed the learning curve for the institution to take a bold step towards leveraging its balance sheet for longer term borrowing at attractive pricing levels,” said Mr Macharia.
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