Microfinance banks burnt their fingers when they tried to target the small and medium enterprise (SMEs) market abandoned by banks after the introduction of the interest rate capping.
The small lenders have since withdrawn, witnessing a seven per cent decline in total assets from Sh72.5 billion in December 2016 to Sh67.6 billion in December 2017, according to the Central Bank of Kenya (CBK) data.
This was contrary to the trend observed in 2015 and 2016, where total assets grew by five per cent and 22 per cent respectively.
SEE ALSO: Bad debt jitters trim Equity profit
“After the cap, they started doing a lot of SME lending, the microfinance institutions (MFIs) got it wrong and they lost a lot of money,” Microsave Consulting Global Technical Director David Cracknell said yesterday at the Africa Banking and Finance Conference in Nairobi.
He said the microlenders were now facing the daunting challenge of defining their space assaulted by mobile lenders and the new crop of borrowers who do not respond to traditional lending models.
“Young people no longer want to go for groups to access credit and there is increasing competition from nano-loans. Microfinance institutions need to redefine how, who they lend to,” he said.
As at December 2017, there were 13 licensed microfinance banks, of which 11 had nationwide microfinance bank licences while two had community microfinance bank licences.
On the other hand, FinAccess Digital Credit Tracker 2018 shows there are more than 48 digital credit providers in Kenya including M-Shwari, KCB M-Pesa, MCo-op Cash, and Equity Bank’s Eazzy Loan.
SEE ALSO: State agency traces money trail of Ruto's Mt Kenya ally
For MFIs, loan advances declined by 8.9 per cent from Sh47 billion in December 2016 to Sh42.8 billion in December 2017. Net advances accounted for 63 per cent of the microfinance banks’ total assets while net fixed assets accounted for 10 per cent of the total assets base.
While CBK said the decline in advances mirrored the slowdown in the economy due to the prolonged electioneering period and drought in 2017, the regulator admitted there was a nonperforming loans problem.
“Most institutions put on hold loans disbursement so as to recover and reduce the outstanding non-performing loans,” CBK said in the Bank Supervision Annual Report 2016.
In 2017, customer deposits also declined by three per cent from Sh40.2 billion in December 2016 to Sh38.9 billion in December 2017.
Mr Cracknell said MFIs needed to learn from the banks by embracing digital transformation to be able to compete - the same methods mobile-based lenders use to increase the number of loans, reduce processes and time and form partnerships with different vendors.
SEE ALSO: Kenyan brands among the most admired in Africa
He said instead of treating customers as homogeneous groups, data can help pinpoint location, validate borrowers and run searches on asset registries and credit ratings before deciding to lend.
Cracknell said microfinance institutions can still grow since they offer bigger loans than mobile platforms, have value chain financing, daily savings for traders, cash advances for school fees and daily microloans.