Mobile money

Micro-lenders are going through a tough time at the hands of established banks.

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Banks turn tables on small lenders

 Microfinanciers are struggling to keep customers as large banks and digital lenders raid their turf through innovative products, leaving them with piling losses and diminishing capital.

The once-attractive market for borrowers seeking small loans and savers chasing high returns has taken a strong beating from competitors, putting micro-lenders on the edge.

The 14 Central Bank of Kenya (CBK)-regulated microfinance banks posted a Sh1 billion loss in the 12 months to June—a jump from Sh0.7 billion loss that was recorded in the previous year's similar period.

But their agony is deeper than just losses. Their capital levels are falling, loan accounts are shrinking and deposits are not coming in as much as they would have wanted.

For clients, the allure for a one-stop shop is growing. Yet micro-financiers are lagging.

Customers are increasingly seeking for an entity that can offer both small and large loans, give some form of insurance and wealth management products and above all, package all these in digital form, while leaving physical branches open.

And large players such as KCB, Cooperative Bank, Equity and NCBA, riding on their popular brands and strong financial muscles, are perfecting this at the expense of microfinance banks.

 Digital lenders  

The years 2015 and 2016 offer some answers to how large banks and digital lenders turned tables on microfinanciers.

Between 2015 and 2019, microfinance banks’ active loan accounts have shrunk by 78,700 or 23 percent to a record low of 263,300. They had about 600,000 loan accounts a decade ago.

Active deposit accounts were at 1.946 million but took a fall to 874,359 accounts at the end of 2016 partly in reaction to fears that small financial institutions could no longer guarantee safety as much as they promised high returns.

With Chase Bank, Imperial Bank and Dubai Bank having sunk into receivership with billions of shillings in deposits, customers’ mentality shifted from just chasing high returns to prioritising safety.

Microfinance banks lost Sh1.66 billion in deposits between 2015 and 2017 and took another two years to attract Sh4.7 billion amid aggressive marketing .

Segmenting of the financial sector into stable and weak institutions as opposed to high and low interest payers on deposits set in, with customers gifting large and stable banks with more deposits.

Loss of large deposits—above the then fully insured Sh100,000— rattled micro-financiers, weakening their ability to lend.

Micro-financiers had to find a way out. And the only exit door they stumbled upon was to borrow expensively and, therefore, lend on tough terms to remain in business.

But with the interest rate cap laws of 2016 setting in, banks were compelled to cut the price of loans to a maximum of four percent above the CBK rate.

Interest rates   

Microfinance banks were exempted from this requirement and this meant their interest rates continued to be above that of banks, giving customers an easier decision to make: vote with their feet.

As the regulator pushed commercial banks to invest more in digital services in order to enhance efficiency and cut costs, micro-financiers had no pressure to innovate.

They posted a combined pre-tax profit of Sh1 billion in 2014 and Sh592 million the following year and have been posting losses since then, making it hard to respond to the fast changing customer needs.

The sub-sector had 4,500 staff members five years ago and now has less than 3,900 but still efficiency is far from being achieved as it lags on the technology front.

It is the CBK’s push for innovations during the rate cap era that has seen commercial banks mount a heightened raid on the turf of microfinanciers at a rate that threatens their existence.

And digital lenders such as Branch and Tala have complicated the equation by taking micro loans at the door step of borrowers at a much faster pace that has made many borrowers blind to the interest rates.

Many micro-financiers are now going back to the market in search of fresh capital to try and turn the tables on the large banks and the aggressive mobile-based lenders.

But microfinance banks’ return on shareholders' equity ratio—a measure of how much money is returned to the owners as a percentage of the money they have invested in a business— cannot motivate current investors to pump in money.

The ratio was at 10 percent in 2015, halved the following year and has averaged negative 2.77 percent since then meaning that microfinance investors are losing about Sh28 for every Sh1,000 they have in the business.

And so, microfinance banks are looking beyond the current shareholders for money to steady their ships.

  SMEP Microfinance Bank  

Last week, US-based digital lender Branch International was cleared to acquire 84.89 percent stake in loss-making Century Microfinance Bank in a deal estimated at Sh230 million.

SMEP Microfinance Bank is also searching for a strategic investor to inject in fresh capital for funding growth on the back of losses hitting Sh292.89 million.

The lender says that it has faced capital and liquidity challenges over the last decade, making it difficult to invest in new business models to meet the changing customer preferences.

Diaspora-backed Choice Microfinance Bank has since 2019 been looking for a strategic investor to buy a majority stake as it seeks fresh capital to finance expansion and boost lending capacity.

Key Microfinance Bank, formerly Remu, is also in search of a strategic investor with talks now believed to be at the tail end.