Poor borrowers prefer Equity to micro-financiers

Micro-finance institutions (MFIs) have since inception styled themselves as the poor person’s bank. They are marketed as the poor man’s ‘saviour’ from prohibitive interest rates charged by commercial banks.

However, data released by the Central Bank of Kenya (CBK) tell a slightly different story. The cheapest micro-loans, which are very small, short-term loans at low interest, especially to a start-up company or self-employed person, in the market are offered by a commercial bank.

According to this data from all financial institutions regulated by CBK including commercial banks, mortgage financiers and microfinance banks, at 14 per cent, Equity Bank has the most competitive rate for micro-loans.

It is followed by National Bank of Kenya at 15.58 per cent. Century Microfinance Bank, a micro-lending institution, comes third with 17.79 per cent.

Micro-loans are popular among the poor for their shorter payment terms, fairer competitive interest rates and easy accessibility to borrowers who have little or no collateral or poor credit. These credits, normally of Sh100,000 or less, are used for such purposes as purchasing equipment or inventory or as a start-up or working capital.

The high risk involved in micro loans probably explains why most commercial banks shy from the trade with only 10 out of 43 commercial banks regulated by CBK offering this product. And when they do offer the product, commercial banks put high average risk premiums on the product. For example, at 34.77 per cent, Family Bank Ld has the highest rates for micro loans. However, the lender gives the best rates in most of the other categories.

From the CBK data, microfinance banks such as Kenya Women Finance Trust (KWFT) and Uwezo Microfinance Bank do not offer micro-loan products but instead offer business loans and asset finance to their customers. Faulu and SMEP microfinance bank had not yet converted their loans to Kenya Banks’ Reference Rate (KBRR) by the time CBK released this report.

Risk premiums puzzle

But it is also interesting to note the high disparity rate by different finance institutions offering micro-loan products when compared to the nearly equal interest rates for the other products.

While some lending institutions like Equity Bank Limited put a risk premium on micro loans for as low as 5 per cent, others such as Family Bank offer at a high of 26 per cent. There is no such gulf in the other segments. This brings into question the manner in which the different lenders arrive at average risk premiums that is added on KBRR. “Publication of information on interest rates for the banking sector is expected to increase transparency, competition, enhance credit access and lower the overall cost of credit to borrowers,” read in part CBK statement.

The CBK report listed nine deposit taking microfinance institutions (DTMs) which are regulated by CBK, however there are hundreds of other non-deposit taking MFIs which are not regulated by CBK. For instance, the Association of Micro Finance Institutions (AMFI) has close to over 50 members and whose interest is not different from what shylocks charge.

“People might not differentiate between DTMs and credit-only MFIs. DTMs are regulated by Central Bank while the credit-only MFIs are not ... but this difference might not be captured when the story is told, and hence the entire industry suffers,” he said.