Mobile lenders drive microfinance entities to early grave

Janet Akinyi, a mama mboga (greengrocer) in one of Nairobi’s low-income suburbs, is neck-deep in debts which she incurred from the myriad mobile lending platforms that seem to mushroom with every crack of dawn.

Yet, unlike some few years ago, she is not worried.

In 2010, she had a similar experience. Only then, instead of mobile loans, she was drowning in a pool of debts she secured from various microfinance institutions (MFIs). Just as in the current mobile phone debt imbroglio, she borrowed from one MFI to repay another one. But this was not sustainable in the long-run and she defaulted.

From then on, she would spend most of her days hiding from different ‘loan sharks’ who were always accompanied by mean-looking auctioneers whose appearance betrayed their darker side than the lenders’ noble intentions of getting their money back.

Her heart jumped to her mouth every time she heard a knock on her door. “At some point, with the high blood pressure getting worse, I was advised to go into hiding,” she remembers. Akinyi’s predicament was not unique.

The zenith of microfinance lending in Kenya, as perfected by institutions such as Kenya Women Microfinance Bank saw many poor borrowers saddled with untenable debts.

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Even as deposit-taking microfinance institutions (simply known as microfinance banks (MFBs) recorded massive profits, it was at the expense of an increasing number of poor borrowers who lost their cows, fridges, TV sets, motorbikes, houses, families and even lives. Loan officers with high targets aggressively signed up poor women in slums and rural villages for loans they did not know how they would repay.

Thus, just as the seeds of micro-lending found fertile grounds across the globe - from Bangladesh through India to Kenya - and grew into sweet fruits that lifted millions out of poverty, they also sprouted bitter fruits.

Grameen Bank founder Muhammad Yunus might have won a Noble Prize for helping the poor people in his home country of Bangladesh wriggle out of the cycle of poverty through, it has also sucked the happiness from the faces of many.

Perhaps, because of MFIs’ bitter fruits, its popularity among Kenyans is fast waning, replaced by mobile lending platforms whose worst threat to defaulters is the many calls and text messages in addition to forwarding their names to Central Rating Bureaus (CRBs).

Most of them are not scared. Or perhaps MFIs are simply being disrupted in the same fashion their advent in the late 1990s shook snobbish commercial banks to their core.

Either way, today, what would be described as sub-prime lending- or lending to people with a lower credit score such as those without collateral, once in a risky territory that only MFIs dare walk into - has dramatically shifted to the mobile phone. Its catastrophe, when it hits, might be painful than MFBs’.

Mobile lending platforms, the new villain among poor borrowers, has just started. And it is riding roughshod on technology. Changing market dynamics, says CBK in the 2017 Bank Supervision Report, presents MFBs with a myriad of challenges.

“These challenges include: changing business environment, primarily driven by technology,” said CBK. But perhaps MFBs’ main usurper, according to CBK, is emerging financial technology (Fintech) and unconventional players in the finance sector like Fintechs.

Fintech is driving local microfinance institutions to an early grave. Numbers for the 13 MFBs regulated by CBK are not inspiring. Deposits are dissipating, loan books are shrinking and profits are drying up.

Loss-making streak

Their pre-tax losses increased to Sh935 million by end of June 2018, compared to a loss of Sh171 million in June 2017. This was an earth-shattering decline of 450 per cent that stretched the loss-making streak by CBK-regulated micro-lenders to three consecutive financial years.

Another report by the regulator shows that by the end of 2017, about 70 per cent of MFBs recorded losses - bringing into question the viability of a financial sub-sector which not long ago was hailed as a panacea for financial exclusion in the country.

With little customer savings coming in, Kenyans, who are yet to trust Tier 3 banks with their money, certainly can’t entrust it to MFBs.

This has forced MFBs to rely on high-cost loans from commercial banks, driving up their operating costs even as the bad-loans surge. “Bad economic conditions would explain the high cost of money and non-performing loans (NPLs),” says Johnson Nderi, a manager at ABC Capital. Four of them - Choice Microfinance, Century, Daraja and Maisha- had breached their minimum statutory requirement for core capital, signalling financial instability. That of Century and Choice slid to the negative zones, -33 per cent for the former against a statutory minimum requirement of 60 per cent and -8 per cent for the latter against a statutory requirement of 20 per cent.

During this period, Kenya Women Microfinance Bank, the biggest MFB and one of those which did not slide into the loss-making zone, however, saw its profit decline by 92 per cent to Sh18.7 million from Sh224 million in December 2016. Only Faulu survived the loss-making whirlwind, registering a profit growth.

Commercial banks, which MFBs derided for their financial aloofness, are leading the mobile lending onslaught.  At first, starting mobile lending simply offered commercial banks another revenue stream.

Commercial Bank of Africa (CBA), Kenya Commercial Bank (KCB) and Equity Bank were among the first to experiment with this revenue stream.

And then politicians put in place the interest capping regime that tinkered with interest income, commercial banks’ main source of income. “Interest rate cap changed the way things were done, encouraging the new technologies,” says Gerrishon Ikiara, an Economics lecturer at the University of Nairobi.

Suddenly, there was a proliferation of digital creditors. Barclays Bank, Co-operative Bank, Family Bank, and Housing Finance joined the fray.

Since the first mobile lending platform in 2012, M-Shwari, by CBA and telecommunications provider Safaricom, the value of mobile payment has surged by 128 per cent to hit 343 billion by December 2018 from Sh150 billion six years ago.

The number of transactions has grown even faster, doubling from 56 million in 2012 to 155 million in 2018.

“There are reports that lending through M-Pesa has overtaken the formal banking system, which was a surprise to me,” explains Ikiara. In three years, however, MFBs’ loan book has shrunk by six per cent from Sh49 billion in 2016 to Sh46 billion by June 2018.

\Moreover, having been given the go-ahead to mobilise savings from the public MFBs have been forced to borrow- sometimes at prohibitive rates- so as to lend.

MFBs’ customer deposits decreased by Sh2.1 billion (five per cent) from Sh40.6 billion to Sh38.5 billion between June 2017 and June 2018, according to the CBK’s 2018 report.

It might be true, as a survey by the Kenya National Bureau of Statistics (KNBS) showed, over half of the credit given out by MFIs tends to go to investment and school fees while a large fraction of credit from mobile loans is used for personal consumption.

But mobile lending platforms are quickly turning this trend on its head, gutting through what Nderi would describe as a niche for MFBs. 

KCB says the share of the money it forked out for investment activities via its mobile lending platform, or B2B (business-to-business) transactions, jumped by 8.2 percentage points in the third quarter of 2018 from 23.6 per cent in the same quarter in 2017.

Although at 49.9 per cent, credit for consumption (B2C) still took up the largest fraction of transactions during this period, it has slowly but surely been thinning down.

Indeed, the quarter three reading of 49.9 per cent was a climb down from 56.1 per cent in the third quarter of 2017.

It is the same with Equity Bank. A huge fraction of the bank’s transactions in the first half of 2018 was done through agencies, mobile, and internet banking, a move that saw its CEO James Mwangi during an investor declare they inching closer to the end of the branch.

Indeed, 93 per cent of the loans were applied and processed through mobile phones, as banking goes digital.

This left only seven per cent of loans - and mostly business - being processed through the branches which Mwangi predicted would be snapped up by mobile loans by the end of 2018 as they moved business loans on mobile phones.

And by end of this year, he said, there will be no loans processed through the branch as corporate borrowers are moved to internet banking. “We are going to witness the death of a branch as we know it,” said Mwangi. If he only knew, he might have added, ‘and Microfinance banks too.”

Transactions on Equity Bank’s Eazzy Banking App grew by 208 per cent to 168 million transactions from 55 million year-on-year and a value of Sh89 billion from Sh52 billion. Equitel’s transaction value grew by 20 per cent to Sh425.1 billion up from Sh353.6 billion.

The losses by MFBs, a number of analysts reckon, might also be informed by the new CBK Governor’s high-handedness.

Unlike his predecessor Prof Njuguna who is said to have been a little cosy with financial institutions, Dr Patrick Njoroge has been ruthless in enforcing regulations. His ultra-regulations has already seen a number of banks go into receivership. “It is difficult to massage the numbers so as to appeal,” said Dr Joy Kiiru, an Economics lecturer at the University of Nairobi. And, as Johnson Nderi, a manager at ABC Capital notes, MFBs don’t like being regulated.  And rightly so. Because they are struggling to mobile deposits, they have to borrow. And they cost of borrowing has gone up.

Commercial banks, sitting on huge deposits of about Sh2.9 trillion as at December 2017 (MFBs deposits is at Sh38.9 billion in the same period), rather than lend to MFBs so that the latter can put a mark-up on the borrowed and lend it to the poor, are instead doing it themselves through mobile lending platforms.

Kiiru says that while it is not bad that MFBs are being dislodged by mobile lending platforms, digital lending also presents another problem- one that was characteristic of MFBs. “There is a rule in lending that only responsible borrowers should access credit. Otherwise, you will infuse instability into the financial system,” says Kiiru.

Besides mobile lending platforms by commercial banks, there are mobile lending apps that have made access to credit extremely easy.

All you need is an impressive record on M-Pesa and a Facebook account whose posts reflect an income earner.

Silicon Valley-based mobile lender, Branch, which has just announced a new financing round of Sh500 million, is one of the increasing digital creditors that have taken over the country by a storm.

The mobile lender which says it has since disbursed more than Sh25 billion using the application, recently raised Sh7 billion to deepen its ability to meet the rising demand for mobile loans.

Branch currently loans out $4 million (Sh400 million) monthly and is one of the top five most downloaded apps in Kenya, according to Jumia’s Kenya Mobile White Paper 2018.

It is estimated that 18.2 million Kenyans own mobile phones and 35 per cent of them have tried at least one digital mobile loan.

About 20 per cent who have not said it was only because of lack of information. At the time of the survey, according to a report by Financial Sector Deepening Kenya (FSD- Kenya).

The report found out that about half of the borrowers had an outstanding loan. As a result, many Kenyans are now caught in a web of mobile loans to service, forcing them to jump from one service provider to another.

The survey, also showed 14 per cent of the digital borrowers were balancing loans from more than one digital lender at the time of the survey, pointing to a refinancing crisis in which one borrows from Paul to pay Peter.

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FintechCentral Bank of Kenya