MICROCAPITAL STORY: Increased Competition for Kenyan Low-Income Financial Market between Microfinance Institutions and Commercial Banks

The East African reported that just as the Microfinance Act has granted particular Kenyan microfinance institutions legal status as deposit taking institutions, they are feeling squeezed from commercial banks which have begun to attract a larger share of what has traditionally been the microfinance market. This trend is occuring as commercial banks are offering more attractive financial products to the best performing microfinance clients, with better terms and more easily met conditions. Particularly at stake are the savings deposits from hundreds of thousands of small businessmen, artisans, and women groups, worth an estimated USD 126.2 million. According to Benjamin Nkungi, the chief executive of the Association of Microfinance Institutions (AMFI), “Banks are able to identify the very best clients of the MFIs, whom they then proceed to poach.”

The Microfinance Act 2006, became operational in May 2008, and creates the legal framework for qualified MFIs to accept deposits and mobilize them as loan funds, providing a valuable source of capital for expansion and financial self-sufficiency. The act also opens up the possibility of MFIs tapping into other sources of capital, including equity capital. The regulations for deposit-taking MFIs are strict and include, among other things, operating nationwide throughout Kenya and retaining core capital amounting to between Sh20 million (USD 252 thousand) and Sh60 million (USD 770 thousand).

MicroCapital reported that the Kenya Women Finance Trust (KFWT) became the first MFI to be granted legal permission by the Central Bank of Kenya to accept and mobilize deposits in January 2009. According to the MIX Market, in 2007 KWFT had over 164 thousand borrowers, a total loan portfolio of USD 60.1 million, and a debt-equity ratio of 337.16 percent . It had USD 86.3 million in assets, and return on assets (ROA) of 5.31 percent.

The Central Bank of Kenya also granted permission to MFI Faulu Kenya to accept deposits. The MIX Market reported that in 2007 Faulu Kenya had over 90 thousand borrowers, a loan portfolio of USD 27.4 million, and a debt-equity ratio of 480.82 percent. It also had USD 46.9 in total assets, and a ROA of 12.14 percent. It is expected that up to 12 more MFIs will receive the same legal status this year after they fulfill the requirements.

Winfred Manda, an accountant at Value Plus Ltd, a sister company of Crossbridge Credit Ltd, explained that since MFIs have proven their clients are bankable, commercial banks have begun relaxing their previously tough lending conditions. MFIs on the other hand have had to continue applying strict conditions so as to prevent excessive defaulting. Crossbridge itself stopped extending personal loans in 2006 due to excessive defaulting, and plans to resume lending later this year, but with more strict conditions.

In competition with commercial banks, MFIs are in many respects at a distinct disadvantage. First, they often rely on loans from the very same banks they are in competition with, and have to mark-up the interest rates to cover their costs. Not only do MFIs offer smaller loan sizes, which have a lower return, they generally have higher overhead costs because they go to the clients, rather than have the clients come to them as do commercial banks. Furthermore, clients may be dissuaded by the relatively involving terms and conditions of MFI loan products, including attending weekly meetings and adhering to strict repayment schedules. Banks on the other hand may offer easier terms and more flexible repayment schedules of up to 48 months.

The encroachment of commercial banks into the microfinance market began when Equity Bank began allowing clients to open up accounts with zero balance. Since then, banks have also begun offering no-collateral loans of USD 630 or more, to further attract low-income clients.

Many in the microfinance sector believen this recent trend is unhealthy, and argue that the clients owe their success to years of having been nurtured by MFIs, at a time when commercial banks refused to serve them. “The biggest dilemma facing many of the groups is whether to stick with the MFIs who have been like mothers to them or to go for the credit inducements offered by banks… This segment of the country’s credit market should be reserved for MFIs,” said Peter Njoroge Karanja, executive director of the Kenya Federation of Self Help Associations (KEFESA). Mr. Karanja fears that the increased competition may drive MFIs out of business

From the commercial bank´s perspective, the trend is a natural sign of growth. Rebecca Gakuru, public relations manager at National Bank of Kenya argued, “Banking is about competition, and the clients moving from MFIs to banks have their reasons for doing so… This is a normal transition. The clients in question cannot stay with MFIs for ever. What MFIs should be doing is acquiring new clients.”

However, Mr. Karanja alleged that some commercial banks are playing unfair by capitalizing on inside information they gained when lending to MFIs: “Banks have access to groups’ savings portfolio and use the information to determine the most bankable of the groups.”

Mr Nkungi, CEO of the Association of Microfinance Institutions, argued that increased competition between banks and MFIs would be healthy “if properly done and when none undermines the other.” He said that the Microfinance Act is a step in this direction: “With this law in place, MFIs will offer banks competition on a level playing field.” The question remains whether the level playing field will be created in time.

By Ryan Hogarth, Research Assistant

Additional Resources:

Association of Microfinance Institutions (AMFI): Home

Faulu Kenya: Home

Kenya Women Finance Trust (KWFT): Home

MicroCapital.org article, October 15, 2008: Kenyan Microfinance Trade Association Puzzled as Only Two MFIs Participate in New “Friendly” Regulation

MicroCapital.org article, January 13, 2009: Kenya Women Finance Trust (KWFT) Becomes First Kenyan MFI to Take Deposits

MIX Market: “Faulu Kenya Profile”

MIX Market: “Kenyan Women Financial Trust Profile”

The East African: Banks ‘Poaching’ on Microfinanciers’ Turf as Battle for Small Savers Intensifies, by John Mbaria