Loss-making microfinance banks (MFBs) might be forced to consolidate their operations after the Central Bank of Kenya (CBK) proposed a 12-fold increase in their minimum core capital.
In new draft regulations, CBK is pushing for a graduated increase of the microlenders’ minimum core capital to Sh250 million in five years, up from the current Sh60 million.
The move is likely to kick off a flurry of acquisitions and mergers of the loss-making entities. The regulator hopes that the move will help stem the haemorrhage by MFBs which, unlike commercial banks that have registered record profits, have been plunging deeper into losses.
MFBs are expected to put aside at Sh60 million within the first year that the regulations come into effect.
The capital adequacy will then go up to Sh100 million within the second year, Sh150 million within the third and Sh200 million within the fourth year.
MFBs’ core and total capital levels have been eroded by the losses reported by the sector as the microlenders struggle to navigate a changing business landscape.
As of December 2017, the MFBs’ ratio of core capital to risk-weighted assets - a measure of a financial institution’s ability to absorb a reasonable amount of loss - declined from 20 per cent to 19.2 per cent and was above the minimum requirement of 10 per cent.
Of the microfinance banks that published their results, only Faulu, Sumac and U&I have reported growth in profit. The rest were stuck in the loss-making zone as they grappled with heavy operating costs against dwindling returns.
In 2017, MFBs’ losses increased by 450 per cent, according to the CBK report.
Pre-tax losses for the 13 MFBs increased five times to Sh935 million by end of June 2018, compared with a loss of Sh171 million in June 2017.
This stretched the loss-making streak by the microlenders to three consecutive years, bringing into question the profitability of the financial sub-sector which not long ago was hailed as a panacea for financial exclusion.
The bank of last resort, CBK, was expected to finalise the drafting of the Microfinance (Amendment) Bill, 2018, Regulations by September 20 last year.
Besides, continuous losses that have led to capital erosion and liquidity stress, MFBs also struggle with weak corporate governance structures and practices.
They also have to contend with elevated credit risk which has led to increased bad loans and inadequate business models.
Technology is another challenge, according to the CBK’s 2017 Bank Supervision Report. “These challenges include changing business environment, primarily driven by technology,” said CBK.
Perhaps MFBs’ main usurper, according to the regulator, is emerging financial technology (fintech) and unconventional players in the finance sector.
Kenya Women MFB has the largest market share with capital adequacy of Sh4.9 billion, followed by Faulu with a capital base of Sh3.9 billion while Rafiki has capital adequacy of Sh509 million.