Foreign investors snap up 5 local microfinance banks

Loss-making microfinance banks (MFBs) have given foreign investors who want to tap into Kenya’s lucrative financial sector a key window to enter after the suspension of licensing of new commercial banks shut out new players.

The lack of liquidity has meant that most microfinance institutions, or MFIs allowed to collect money from the public, struggle to mobilize deposits.

This, along with stiff competition for their mobile lender clients, has pushed MFBs into the red.

To continue, some MFB owners have chosen to cede their stake to foreign investors who have an interest in the country’s financial sector.

Some of the suitors were foreign players who were active in digital lending in the country but for unknown reasons, they are not yet licensed by the Central Bank of Kenya (CBK).

The government has come up with new regulations that require even MFIs that do not accept deposits to be placed under the supervision of the Central Bank of Kuwait.

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

The Competition Authority of Kenya (CAK) on Friday approved the acquisition of a 51% stake in SMEP Microfinance Bank by US-based Christian non-profit organization Hope Advancement Inc.

Hope Advancement, an investment arm of Hope International, has acquired the majority stake in the small lender for $4.65 million (Sh 642.9 million), deepening acquisitions in Kenya’s microfinance sector.

Key Microfinance Bank, formerly Remu, last year completed a deal that paid LOLC Mauritius, a wholly owned subsidiary of LOLC Holdings — a Sri Lankan company — Sh237.41 million for a 73.29 percent stake.

In the same year, Century Microfinance Bank was given the green light to acquire from Branch International Ltd.

Branch, a financial technology company based in San Francisco, California with offices in Lagos, Mumbai, and Nairobi. and took an 84.89 per cent stake in Century at Sh230m.

Choice MFB, a Kajiado-based company founded by Kenyon in the diaspora, also last year gave away an 85 percent stake in Wakanda Network Limited — a private limited company incorporated in London.

Uwezo, another MFB, was acquired in May 2021 by the African Peace Bank – a Bank of Djibouti.

Microfinance banks, which are regulated by the Central Bank of Kuwait, are going through a turbulent and rugged region exacerbated by new technologies, making them an easy target for foreign investors looking for an entry point into the Kenyan financial system.

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The highlight of the Supervisory Report 2023 is the devastation of MFIs with their financial results showing that most are stuck in loss territory, as they grapple with huge operating costs against dwindling returns.

The report showed that microfinance companies recorded a combined pre-tax loss of NIS 980 million on December 31, 2022, compared to a loss of Kshs 877 million on December 31, 2021.

Only four out of 10 institutions reported earnings.

The Central Bank of Kuwait indicated that the main contributors to the loss situation were Maisha Microfinance Bank and Rafiki Microfinance Bank which reported pre-tax losses of Sh4, 77 million and Sh314 million, respectively.

Central Bank of Kuwait reports showed that the total assets of the sector as of December 31, 2022 amounted to 70.4 billion shekels compared to 73.9 billion shekels reported in the year ending in 2021, and loans extended decreased by 1.9 percent from 40.1 billion shillings in 2021 to 39 shillings. 3 billion in December 2022.

The Central Bank of Kuwait said in the report that the decline in loans was due to competition from commercial banks and digital lenders.

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

The mounting losses resulted in some microfinance banks violating critical capital and liquidity ratios. To be on the regulator’s good books, some of its shareholders have passed their stakes to foreign investors.

Moreover, at the end of last year, the Central Bank of Kuwait revoked all licenses for microlenders and asked them to apply again.

“What’s happening now is that the big players, the international players, are reaching out to people who have licences,” says Peter Macharia, CEO of Jijenge Credit Limited, a credit-only microfinance institution.

Of the nearly 700 microfinance institutions and digital lenders that have applied for licenses, only 22 are said to have received approval from the Central Bank of Kuwait to continue lending.

Some of the big mobile lending platforms are missing from the list.

The Central Bank of Kuwait came up with the regulations on digital lenders (both credit microfinance and mobile phone lenders are classified as digital credit providers) in the wake of a wave of predatory lending.

The financial regulator has noted that there is a risk that these platforms are being used to clean up dirty money.

Macharia added that microfinance banks, as well as small banks, were victims of scarce liquidity with major banks not lending to them.

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Small lenders and the MFB also struggled to mobilize deposits, as most investors chose to put their money in larger banks or in government securities as interest rates rose to 14 percent for long-term government papers known as Treasury bills.

While most investors would have preferred starting a new bank, the Central Bank of Kuwait, the financial regulator, placed a moratorium on licensing new banks in 2015.

This moratorium has not yet been lifted.

With microfinance banks suffering a lot of losses, and their liquidity and capital ratio low, investors wanting to immerse themselves in the Kenyan financial system have started snapping up these small lenders.

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

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