Microfinance firms yet to take advantage of friendly law

Heightened competition in the banking sector is spilling over into microfinance institutions posing a threat to their survival.

As banks expand their reach, they are slowly courting the bedrock of microfinance firms--low income earners and micro and small enterprises.

But even as commercial banks encroach on their turf, microfinance institutions are failing to take advantage of a law that could protect their interests.

The Microfinance Act 2006 that became operational on May 2 this year allows MFIs that register under it to take deposits, a function that they are not currently allowed to perform.

Unlike banks, microfinance institutions rely on shareholder funds to lend money, thus limiting their lending capacity. Banks, on the other hand, use deposits to grant loans.

“We have only received two applications for a (deposit-taking) license under the Act,” Central Bank of Kenya director in charge of the bank supervision department Rose Detho told the Sunday Nation.

The Act, therefore, among other things allows eligible MFIs to transform themselves into deposit-taking institutions, a move that would put them in a better position to take on the banks in the scramble for depositors.

This would enable them to provide savings, credit and other financial services to MSEs and low-income earners in both rural and urban areas.

“It is time we stopped acting as a conveyor belt for banks that wait for us to nurture clients for years before snatching them away as soon as they have money to deposit,” said Anne Mutahi, the chairperson of the Association of Microfinance Institutions (AMFI), a 42-member industry lobby.

The transformation, which on the face of it looks simple, will see the institutions gain access to the huge savings they hold - estimated at between Sh15 billion and Sh20 billion by January this year - to lend to their clients.

Currently, they have to deposit the money in banks where they incidentally borrow at a higher interest rate than they earn from deposits for onward lending to their clients.

One-stop shop

“By starting to take in deposits, we will offer our clients a one-stop shop service, thereby meeting all their financial needs,” says Dr Jennifer Riria, the managing director of the Kenya Women Finance Trust (KWFT), one of the two institutions that have applied for the deposit-taking license.

Albeit slowly, more institutions could follow suit because CBK, the banking industry regulator, says it has already approved about 20 business names and expects to receive more license applications in the next six months.

“Some of our members have applied, and more will be following suit very soon,” said Ms Mutahi, who is also the managing director of Jitegemee Trust, an MFI.

She says the new regime will promote the development of a stable microfinance industry as an integral part of the formal financial system.

Major players

Some of the major players that either offer only microfinance or with an element of social welfare activities, include Faulu Kenya, KWFT, Small and Medium Enterprise Programme (SMEP), Jamii Bora and Jitegemee Trust.