Microfinance banks sink deeper in the red as defaults hit Sh14.7b

Customers have defaulted on nearly a third of the Sh45.2 billion borrowed from microfinance banks (MFBs), piling more pressure on the small lenders.

Central Bank of Kenya (CBK) data shows gross non-performing loans for MFBs hit Sh14.7 billion in June 2022, up from Sh12.3 billion in a similar period last year.

The MFBs, alarmed by the increased defaults, slammed breaks on lending, cutting their combined loan book from Sh49.4 billion in June 2021 to Sh45.2 billion in June 2022.

The increased defaults and shrinking loan book sent the gross non-performing loans (NPLs) ratio - the portion of the credit for which no interest or principal has been received for at least 90 days - to 32.5 per cent by end of June.

The ratio was an increase from 25 per cent seen in June last year and has widened the gap between the rate of loan defaults in MFBs and commercial banks.

Commercial banks' NPL ratio stood at 14.7 per cent in June 2022 compared to 14 per cent in a similar period last year, with CBK attributing the increase on the challenging business environment.

Despite the rise in loan defaults, MFBs were able to cut their combined pre-tax losses in the year to June 2022. CBK data shows the pre-tax losses for 12 months to June 2022 was Sh334.9 million, a fall from Sh2.4 billion that was posted in a similar period last year.

The MFBs also witnessed a flight of deposits. Total customer deposits decreased by 5.5 per cent to Sh48 billion in June 2022 from Sh50.8 billion in June 2021.

MFBs have endured over six years of losses. The micro-financiers last posted a combined profit (Sh489 million) in the financial year that ended June 2015.

But several have welcomed new investors who are promising to pump in money to try and stem the poor performance.

In total, five out of the 14 MFBs licensed by the CBK have been acquired, including Key, Choice, Uwezo, Century and Daraja.

LOLC Mauritius, wholly owned by Sri Lanka's LOLC Holdings, paid about Sh237.41 million for a 73.29 per cent stake in Key MFB.

Choice MFB, a Kajiado-based firm started by Kenyans in the diaspora, ceded 85 per cent stake to Wakanda Network Ltd, a private company incorporated in London.

Uwezo was in May last year fully acquired by Salaam African Bank while Branch, a California-headquartered fintech with offices in Lagos, Mumbai and Nairobi, acquired 84.89 per cent stake in Century at Sh230 million.

UMBA Inc, a fintech company incorporated in the State of Delaware, US, and has headquarters in San Francisco, California acquired 66.06 per cent stake in Daraja in May 2022.

SMEP is still seeking for a strategic investor to buy an undisclosed stake in the business.

The microfinancier said it will use the money raised from the deal to fund growth and also strengthen its capital base.

But there will be no soft landing for the new investors who have up to four years to build value in these MFBs to profit when they sell down their stakes to limits permitted by law.

Kenya's Microfinance Act, 2006 does not allow a single person or institution to hold more than 25 per cent stake in a microfinance firm but Treasury has been granting four-year exemptions - speeding up the deals.

The new investors face a test in overcoming the prevailing streak of losses, eroded capital, shrinking market share and tough aggressive competition from large banks and digital lenders.

This is at a time they have spent millions of shillings to buy majority stakes in MFBs to mirror the trend in the commercial banking sector, where several struggling lenders have also been acquired.

Microfinance institutions have not had the best of times in the market as large banks and digital financiers continue to raid their turf.

For instance, Key Microfinance Bank, formerly Remu MFB, posted a Sh50.78 million net loss last year compared to a Sh33.98 million loss in 2020. Choice MFB's poor financial performance continued last year as it posted a Sh23.5 million loss against Sh21.23 million loss the previous year.

Uwezo also posted a loss. The MFB's net loss widened from Sh17.52 million in 2020 to Sh30.59 million last year.

Faulu Microfinance Bank last year returned a net loss of Sh407 million compared to a loss of Sh374 million in the previous period.

While Kenya Women Finance Trust emerged from a loss of Sh1.44 billion in 2020 to Sh157 million net profit, Rafiki MFB posted a loss of Sh153 million last year compared to Sh152 million loss in 2020.

The new owners of the five MFBs will have to rewrite the rules of the game and turn the tables on banks and digital lenders who have raided MFBs' turf to pose an existential threat.

Out of the 14 microfinanciers, three hold community microfinance bank licences, while 11 have nationwide licences.

Digital lenders have complicated the equation for micro-lenders further.

They are taking micro-loans to the doorsteps of borrowers at a much faster pace.

CBK's annual supervision report for last year noted that the majority of MFBs view digital lenders as key competitors, especially after digital credit providers came under formal regulation.

"Some 36 per cent of the banks indicated that the regulations (for digital lenders) would greatly impact their lending business strategies, compared with 79 per cent of MFBs. This indicates that MFBs perceived DCPs as competitors," the report said.

MFBs closed last year with 724,500 active deposit accounts, far from the peak of 2013 when they held 1.946 million accounts.

Active loan accounts closed the year at 221,000. They had about 600,000 loan accounts 12 years ago.

Reduced loan and deposit accounts as well as mounting losses have seen their core capital nearly halve from Sh10.4 billion in 2016 to Sh6.52 billion at the end of last year.

While microfinance banks are supposed to be a natural pick for micro, small and medium-sized enterprises (MSMEs), the reality is far from this.

Of the Sh638 billion outstanding MSME loan balance as at end of December 2020, commercial banks had lent Sh605 billion, or 95 per cent, while microfinance banks lent Sh33 billion.