Micro-financiers on the edge like big banks, digital lenders are plundering the field

President Uhuru Kenyatta presents the trophy and the certificate of the best financial institution other than the bank to the Chairman of the Board of Directors of Kenya Industrial Estate (KIE) Mugambi Imanyara. [Jenipher Wachie, Standard]

Small is the new big thing for borrowers. They like it best when it’s served quickly and digital lenders know that.

It is this understanding that has seen digital lenders, many of whom are backed by foreign financiers, eat the lunch of microfinance banks. Too many that many microfinance banks face an existential threat.

And big banks are joining the lunch table too, rolling out cool apps that have changed banking – from visiting branches to pressing buttons on their phones.

They include M-Shwari, KCB M-Pesa, Fuliza – one discovery facility among others.

For many customers, it’s not a question of price. It’s about accessibility. They want a financial institution that can meet their needs now – tomorrow is a century behind.

Once considered an attractive step for borrowers looking for small loans and savers looking for high returns, micro-financiers are now on the edge. The losses are piling up. The capital is decreasing.

It has been six years since the 14 microfinance banks regulated by the Central Bank of Kenya (CBK) generated a combined profit. And it’s not getting any better.

Micro-financiers are losing customers. Deposits are not coming in as much as they would have liked. Their loan portfolio is shrinking and their competitors – digital lenders and big banks – are the winners.

Pre-tax losses of microfinance banks more than doubled to 2.4 billion shillings in the 12 months ended June 2021, exacerbating their difficulties as big banks and digital lenders continue to plunder their territory.

The 14 micro-financiers had repaid the loss of 1 billion shillings in the 12 months to June of last year. The latest loss therefore marks the sixth consecutive year of losses for micro-financiers.

They last posted a combined profit of 489 million shillings in the fiscal year ended June 2015.

Over the past year, small lenders have experienced low use of credit, a high level of defaults and declining interest income. Defaults rose 32 percent to 13 billion shillings.

Of the 14 microfinancers, three hold community microfinance banking licenses, while 11 have national licenses.

Micro-lenders are dragging their feet on innovations, with CBK data showing only three have had branch-based banking services since its inception ten years ago.

Yet customers have invaded branch banking and want it all done on their smartphones. Without this capacity, micro-financiers are in difficulty.

Last year, micro-financiers closed four branches, cut 32 marketing offices and parted with 1,300 agents, which could further weaken growth prospects.

Even in the face of the Covid-19 disruptions which have seen many companies reorganize their models to adapt to the new world, micro-financiers have fallen behind in accelerating their digital strategies.

The CBK affirms that while 56% of banks have innovated a specialized product to curb the effects of the coronavirus, only 29% of micro-financiers have reacted.

And digital lenders like Zenka, Oye, Sotiwa, Okolewa, Branch, and Tala have further complicated the equation for micro-lenders. They are accepting micro loans at the doorstep of borrowers at a much faster rate.

Digital Lenders Association of Kenya (DLAK) President Kevin Mutiso said they were responding to a need that had been overlooked and almost viewed as undeserving of loan.

“People are looking for small loans to invest in businesses, invest in themselves through education, and solve emergencies. And that informs the structure of our products, ”said Mr. Mutiso.

For example, Mutiso said digital loans, which currently average between 1 and 2 billion shillings per month, are popular when schools close or open.

“What moves Kenya and the borrowing patterns we see is the school calendar. Expenses increase when children are at home or return to school. This is when we see our loans peaking, ”Mutiso said.

Although it is a large market, microfinance banks can only monitor remotely. Without good digital apps, instant lending remains a mirage.

The few micro-lenders who have digital applications have failed to gain many clients, thanks to the many charges.

Micro-lenders such as Faulu Microfinance Bank charge clients for checking balance, purchasing airtime, or mini-statements, which makes apps unpopular among price-sensitive clients.

Yet the attractiveness of customers to financial service providers under one roof is increasing. Businesses that can offer consumer loans as well as development loans, teach savings and lifestyle are now a priority for clients.

It takes money. And big banks like KCB, Cooperative Bank, Equity, and NCBA have it – along with strong financial muscles and branding.

The fierce competition has been intensified by the many digital lenders who, along with the banks, now eat the lunches of microfinance banks.

Last year, the number of active deposit and loan accounts for micro-financiers fell to more than a decade, as Covid-19 compounded the already dire situation.

Last year, microfinance banks lost 396,800, or 37% of their active deposit accounts, deviating significantly from the peak of 2013 when they held 1.946 million accounts.

The decline in deposit accounts also occurred during the period when active loan accounts fell 46,900 or 17.8% to 219,400, the lowest in more than eleven years. They had about 600,000 loan accounts 11 years ago.

Last year, the loan portfolio shrank five percent to 44.18 billion shillings, meaning the 14 micro-financiers have an average loan portfolio of 3.16 billion shillings.

The reduction in loan and deposit accounts as well as the growing losses saw their capital base cut by almost half, from 10.4 billion shillings in 2016 to 5.49 billion shillings at the end of the year. last.

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

Of the outstanding balance of loans to micro-small and medium-sized enterprises (MSMEs) of 638 billion shillings at the end of December last year, commercial banks had lent 605 billion shillings or 95 percent, while banks microfinance loaned 33 billion shillings, or the equivalent of five percent.

This despite the deposits of MSMEs in microfinance banks amounting to 25.74 billion shillings or 52.2 percent of the total deposits held by microfinance banks.

Compared to 2017, this figure has also fallen. MSME deposits represented 72.5% of total deposits in microfinance banks in 2017.

The contrast means that micro-lenders are not attracting deposits from small entities as quickly as they used to be.

“The decline in the proportion of MSME filings to total filings can be attributed to a proportionately larger increase in non-MSME filings than MSME filings over the review period,” said the CBK.

CBK says commercial banks have realized that venturing into markets they deem risky, such as loans to MSMEs, is much easier by providing customer-centric products.

Over the past year, commercial banks have created various products for unique segments of MSMEs such as women, farmers and suppliers.

To turn the tide on big banks and aggressive mobile lenders, microfinance banks need money – for innovation, lending and marketing.

And so many of them, including SMEP Microfinance Bank and Choice Microfinance Bank, are back in the market in search of new capital.

Current shareholders have seen losses wipe out their investment and need special motivation to invest again.

The rate of return on microfinance bank equity (a measure of the amount of money returned to owners as a percentage of the money they invested in a business) was minus 28% last year.

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