Foreign investors snap up 5 local microfinance banks

A Smep branch in Nairobi. FILE PHOTO | POOL

Loss-making microfinance banks (MFBs) have given foreign investors who want to tap into Kenya’s lucrative financial sector a major window for entry after a moratorium on licensing new commercial banks locked out new players.

Tight liquidity has seen most of MFBs, or microfinance institutions allowed to collect money from the public, struggle to mobilise deposits.

This, coupled with cut-throat competition for their customers from mobile lenders, has pushed MFBs into the red.

To keep going, some of the MFB owners have opted to cede their stake to foreign investors who have interest in the country’s financial sector.

Some of the suitors have been foreign players that have been active in the country’s digital lending field but which, for unknown reasons, are yet to be licensed by the Central Bank of Kenya (CBK).

The government came up with new regulations that require even non-deposit taking microfinance institutions to put under the watchful eye of CBK.

At least five out of the 14 microfinance banks licensed by the Central Bank of Kenya (CBK) have been acquired or were in the process of being acquired by the end of 2022 as they struggled with losses and thin capital bases.

On Friday, the Competition Authority of Kenya (CAK), approved the acquisition of a 51 percent stake in SMEP Microfinance Bank by a US Christian faith-based nonprofit organisation Hope Advancement Inc.

Hope Advancement, an investment arm for Hope International, acquired the majority stake in the micro lender for $4.65 million (Sh642.9 million), deepening acquisitions in Kenya’s microfinancing sector.

Key Microfinance Bank, formerly Remu, last year completed a deal that saw LOLC Mauritius, a firm that is wholly owned by LOLC Holdings — a Sri Lankan firm— pay Sh237.41 million to acquire 73.29 percent stake.

In the same year, Century Microfinance Bank was also given green light to be acquired by Branch International Ltd.

Branch, a San Francisco, California-headquartered financial technology firm with offices in Lagos, Mumbai and Nairobi. It got 84.89 percent Century stake at Sh230 million.

Choice MFB, a Kajiado-based firm started by Kenyans in diaspora, last year also ceded 85 percent stake to Wakanda Network Ltd — a private limited company incorporated in London.

Uwezo, another MFB was in May 2021 fully acquired by Salaam African Bank — a Djibouti lender.

Micro finance banks, which are regulated by CBK, have been going through a rough turbulent terrain that has been aggravated by new technologies, making them a soft target for foreign investors looking for an entry point into Kenya’s financial system.

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The key highlight of the Supervision Report 2023 is the devastation of MFBs with their financial results showing that most of them are stuck in the loss-making zone, as they grapple with huge operating costs against dwindling returns.

The report showed that MFBs recorded a combined loss before tax of Sh980 million as at December 31, 2022, compared to a loss of Ksh.877 million as at December 31, 2021.

Only four institutions four out of the 10 institutions reported profits.

CBK noted that the main contributors to the loss position were Maisha Microfinance Bank and Rafiki Microfinance Bank which reported losses pre-tax loss of 4Sh77 million and Sh314 million, respectively.

The sector’s total assets as at December 31, 2022 stood at Sh70.4 billion, in comparison to Sh73.9 billion reported in the year ended 2021, CBK reports showed.Loan advances decreased by 1.9 percent from Sh40.1 billion in 2021 to Sh39.3 billion in December 2022.

“The decline in loans was attributed to competition from commercial banks and digital lenders,” said CBK in the report.

Customer deposits also decreased by 7.8 percent from Sh50.4 billion in 2021 to Sh46.5 billion in 2022 as depositors transferred funds to alternative attractive investments due to the overall increase in interest rates, according to the regulator.

Increased losses have meant that some microfinance banks are in breach of critical capital and liquidity ratios. To be in the good books of the regulator, some of their shareholders have been ceding their stakes to foreign investors.

Moreover, towards the end last year, CBK cancelled all the licenses for micro-lenders and asked them to apply afresh.

“What is happening now is the big players, the international players, have been approaching people with licenses,” says Peter Macharia, the chief executive officer of Jijenge Credit Limited, a credit-only microfinance institution.

Of the close to 700 microfinance institutions and digital lenders that had applied for licenses, only 22 are said to have received CBK’s nod to continue lending.

Some big mobile lending platforms have been missing from the list.

CBK came up with the regulations for digital lenders (both credit only microfinance and mobile phone lenders have been categorized as digital credit providers) following an outcry of predatory lending.

The financial regulator noted that there a risk of these platforms being used to clean dirty money.

Mr Macharia added that microfinance banks, as well as small banks, have been victims of tight liquidity with big banks not lending to them.

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The small lenders and MFBs have also struggled to mobilize deposits, with most investors opting to put their money into bigger banks or in government securities where interest rates have been as high as 14 percent for long term government papers known as Treasury Bonds.

While most of the investors would have preferred to start a new bank, CBK, the financial regulator, put a moratorium on licensing of new banks in 2015.

This moratorium is yet to be lifted.

With microfinance banks making a lot of losses, and their liquidity and capital ratio declining, investors wanting to plunge into Kenya’s financial system have been snapping up these micro lenders.

Major MFBs in Kenya include Kenya Women, Faulu, Rafiki and SMEP.

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