Microfinance banks have posted a combined loss for the eighth straight year, highlighting the impact of raids on their turf by large banks and digital lenders.
Central Bank of Kenya (CBK) data shows that pre-tax losses by the 14 microfinance banks it regulates widened 2.4 times to a record Sh2.39 billion in the financial year ended December 2023 as their revenue shrank and operating costs piled.
Last year’s performance means that microfinanciers maintained their loss-making streak, having last posted a profit in 2015.
Their pre-tax profit was at Sh592 million, a decline from the record pre-tax profit of Sh1 billion it had registered in 2014.
The CBK says the once-attractive market for borrowers seeking small loans and savers chasing high returns has taken a beating from banks and digital credit firms, putting them on the edge. This is despite the microfinance banks having attracted millions of shillings through acquisitions in the past two years.
Last year alone saw their loan book shrank by 4.7 percent to Sh37.5 billion, cutting their revenue in the period their deposits dropped by 6.0 percent to Sh43.86 billion to put at stake their main source of money for lending.
“The decline in loans was attributed to competition from commercial banks and other credit providers,” said the CBK in the 2023 annual supervision report made public on Thursday.
“The decline in deposits was attributed to the transfer of funds to alternative attractive investments due to the overall increase in interest rates.”
Half of the microfinanciers returned a pre-tax loss, with the largest coming from Kenya Women (Sh939 million), followed by Faulu (Sh719 million), Rafiki (Sh434 million), On It (Sh227 million), Salaam (148 million), Umba (Sh66 million) and LOLC (62 million). Top pre-tax profits came from Branch (Sh98 million), Caritas (Sh39 million), and U&I (Sh38 million). Large banks, including Equity, KCB, NCBA, and Co-operative Bank of Kenya, have all been rolling out products targeting small borrowers, riding on technology.
The entry of banks into the micro-lending segment, added to competition from digital lenders such as Tala and Branch, has further turned the tables on microfinance banks, which are also losing the battle for agency banking. The micro-lenders last year lost 277 or a quarter of their agents even as banks recruited more.
CBK disclosures show that microfinance banks have more than just losses and deposits to worry about. Their capital levels are falling and loan accounts.
The reduced deposits are condemning them to tap expensive loans to lend and therefore denying them a chance to compete on pricing—something that has cut their loan book to levels last seen over 10 years ago.
The microfinanciers’ net loans and advances dropped for the fourth straight year to close 2023 at Sh37.47 billion, being closer to the Sh39.18 billion loan book they held at the end of 2014. Customers are not tapping loans from these deposit-taking microfinance banks as they used to a decade earlier when the sector had 456,500 loan accounts. The number fell below 300,000 accounts in 2019.
CBK data shows the loan accounts held by the 14 microfinanciers dropped by 22,320 to 262,152 last year, an equivalent of 57.4 percent of the 456,500 loan accounts held in 2013.
The fall in value and number of loans mirrors the findings of a separate CBK survey on micro, small, and medium enterprises (MSMEs) access to credit, which showed microfinance banks were by the end of 2022 charging small businesses up to 32 percent interest rates on loans despite insisting on collateral.
The CBK survey showed microfinanciers raised the average interest rate charged to small businesses up to 27 percent at the end of 2022 compared with 15.5 percent charged by commercial banks in the same period.
Microfinance banks charged small businesses between 20 percent and 21 percent on average in 2022 compared to 2020 where charges ranged from 12.3 percent to 22 percent, with the CBK terming this as inappropriate.
“Owing to the high cost of these facilities, they are not appropriate for long-term business developmental needs and do not support growth,” said the CBK in the survey published in June last year.
The drop in loans has also come with a decline in deposits as savers take their money elsewhere. From holding Sh24.75 billion deposits spread in 1.95 million deposit accounts in nine microfinance banks, the number of deposit accounts has been coming down sharply despite the CBK having licensed an additional five microfinanciers over the past decade.
The 14 microfinance banks last year lost 105,358 deposit accounts to close at 1.04 million accounts as deposits dropped to Sh43.86 billion from Sh46.49 billion a year earlier.
The latest number of deposit accounts is over 900,000 less or a decline of 53.6 percent compared with 1.95 million accounts in 2013. The more than halving in the number of deposit accounts has also come with the fall in the value of deposits. Last year’s dip in deposits marked the third straight year of decline from Sh50.4 billion in 2021.
The piling losses, rising costs, and falling deposits have forced the microfinanciers to go to the market in search of fresh capital, much of which has come in through ceding their stakes to new investors.
Out of the 14 microfinanciers regulated by the CBK, six—SMEP, Maisha, Key (formerly Remu), Century, Choice, and Uwezo—have been acquired over the past three years through multi-million-shilling deals.
The Microfinance Act, of 2006 does not allow a single person or institution to hold more than a 25 percent stake in a microfinance firm, but the Treasury granted them four-year exemptions. The exemption means new investors will have up to four years to sober up the earnings of these microfinanciers if they are to sell the excess stakes at a profit.
Microfinance banks’ return on shareholders’ equity—a measure of how much money is returned to the owners as a percentage of the money they have invested in a business—has been negative since 2017.
The ratio was at 10 percent in 2014, halved the following year, and then fell to negative 3.2 percent. The ratio last year hit a dismal record of negative 35 percent from the previous year’s negative 11 percent.
Editor’s note: The story have been revised to change reference to SMEP as having incurred a pre-tax loss Sh434 million. The correct position is that SMEP posted a pre-tax profit of Sh12 million, an improvement from Sh3 million a year earlier. The Sh434 million loss was posted by Rafiki microfinance.
