MICROCAPITAL STORY: Kenya’s K-Rep Bank Brings in New Manager as a Response to $4.4m Loss in 2008

K-Rep Bank, a Kenyan commercial bank that targets the microfinance sector, appointed Gerard Monteiro as the new Chief Operations Advisor after reporting a Sh 349 million (USD 4.4 million) loss for 2008. It is hoped that Mr. Monteiro, a 33-year veteran of the banking and microfinance sectors, will help to reverse the five-year low-profitability trend K-Rep Bank has faced.

K-Rep Bank was formed in 1997 as a subsidiary of K-Rep Group Limited, a Kenyan development agency that provided funds to NGOs for microfinance. In 2000, K-Rep Bank became the first commercial bank in Kenya to directly target low-income clients. By the end of 2007, the Bank had almost 154,000 active borrowers, and a gross loan portfolio of USD 81 million. More information about K-Rep Bank’s background and structure can be found in this MicroCapital story.

While K-Rep had a Sh 131 million (USD 1.6 million) pre-tax profit in 2007, the Bank registered Sh 349 million (USD 4.4 million) in pre-tax losses for 2008. In fact, its non-performing loan portfolio had more than doubled to Sh 1 billion (USD 12.6 million), compared to Sh 431 million (USD 5.4 million) the year before. These losses were initially attributed to post-election violence in Kenya and the global economic slowdown, as well as large investments in the Bank’s information and communication technology (ICT) infrastructure, however several additional factors have since been identified.

K-Rep failed to mobilize additional deposits after opening three new branches – Kenyatta Market in Nairobi, Kilimani, and Kitui. At the same time, the Bank failed to increase lending, with lending levels barely reaching double deposits, despite a Kenyan law that allows commercial banks like K-Rep to lend up to 12.5 times its deposits. Lagging lending can be attributed to the decreasing liquidity of the bank, which dropped from 32 to 25 percent – close to the 20 percent minimum statutory liquidity.

To make matters worse, K-Rep’s costs had become extremely high due to overstaffing at the senior level, with 14 senior managers by the first quarter of 2008, as well as a rapid rise in salaries and a move of headquarters from the low-income Kanwangware neighborhood to Kilimani. In total, K-Rep’s expenses rose 45 percent to Sh 1.65 billion (USD 20.7 million) compared to Sh 913 million (USD 11.5 million) the previous year. The problem of rising costs was compounded by alleged differences among managers over the bank’s strategy.

K-Rep’s fortunes have been contrasted with that of Equity Bank, a Kenya-based microfinance institution which was launched the same year as K-Rep. Equity Bank has over 618,000 active borrowers, a gross loan portfolio of USD 523 million, and posted more than Sh 5 billion (USD 62.9 million) in profit for 2008. As Equity Bank faces the same political and economic conditions as K-Rep, it appears that the internal conditions at K-Rep Bank contributed heavily to this past year’s losses.

The current situation at K-Rep Bank is surprising given its strong reputation in the microfinance industry. Confidence in the Bank was clear in several earlier MicroCapital stories, as K-Rep received large-scale financing from investors such as the Netherlands Development Finance Company (FMO), the Hivos-Tridos Fund, and the Tridos Fair Share Fund. This reputation culminated in the 2006 high-profile visit of Barack Obama, during his trip to Kenya as a Presidential candidate, where he commended the Bank’s work; “The Kenyan Government needs to support such programs. It is a wonderful model replicated in many parts of the world.”

Mr. Monteiro was brought on to lead K-Rep Bank through this difficult period and help the Bank return to a position of profitability and respect within in the microfinance community. He has already begun to implement changes. In order to cut costs, Mr. Monteiro is examining K-Rep’s organizational structure and moving the bank out of two floors of the new headquarters. Mr. Monteiro is also monitoring end-user usage of funds to track repayment, and he is looking at ways to make the bank more attuned to the needs of its clients.

The new chief executive has said that there is already an indication of profit beginning this month, and he expects this profit to be carried on throughout the year. However, whether Mr. Monteiro will be the “turnaround manager” K-Rep needs remains to be seen.

By Jaclyn Berfond

Additional Resources:

Business Daily: K-Rep Bank Brings in Turnaround Manager by Geoffrey Irungu

Business Daily: K-Rep Bank Registers Losses As Loan Defaults Take Toll by Geoffrey Irungu

K-Rep Bank: Homepage

MIX Market: Homepage

MicroCapital Story: Kenya’s K-Rep Bank Records Loss in Profits, Receives New Capital from IFC, African Development Bank, Shorecap International, Triodos, FMO, K-Rep Group

MicroCapital Story: Senator Obama Visits K-Rep Bank, a Microfinance Institution in Kenya’s Kibera Slum

MicroCapital Story: The Netherlands Development Finance Company offers USD 7 million Loan to Kenya’s K-Rep Bank

MicroCapital Story: Dutch Hivos-Triodos Fund and Triodos Fair Share Fund Make a USD 1.45 mn Loan to K-REP Bank of Kenya