CBK seeks to level financial playing field

Micro-finance institutions could be headed for better times if amendments proposed by the Central Bank of Kenya to a finance act see the light of day.

In recently released policy brief on the review of the Micro-finance Act and Regulation, the regulator has proposed that deposit-taking micro-finance institutions (DTMs) be allowed to operate current accounts in order to create a level ground on which to compete with commercial banks offering the same services.

The review comes at a time when micro-finance firms have entered the regulated arena offering a wider range of products.

A number of commercial banks that have also entered the fray are changing the dynamics of the industry, significantly reducing the distinctiveness of the sub-sector.

According to CBK, the development has brought micro-financiers into stiff competition with banks which offering a wide range of products including cheque transactions and issuance of third-party cheques.

“The deposit-taking micro-finance institutions are at a disadvantage compared to banks offering micro-finance products as the former can neither issue third-party cheques nor open or operate current accounts,” said the Central Bank.

The new regime is expected to create an enabling environment for a more robust, stable, efficient and viable micro-finance sub-sector in Kenya.

“To overcome these hurdles and tap into the perceived opportunities, it is proposed that DTMs should be allowed to operate current accounts to boost their deposit mobilisation capacity and participate in the national payment system,” a dispatch from the bank reads.

Speaking to Sunday Business, SMEP Limited chief executive Phyllis Mbungu said the amendment would represent a major achievement for the company and other players in the sub-sector because they will be able to offer critical financial services especially for business people who make up the bulk of the clientele.

“In the past, our customers have had to transfer loans once we give them to banks where they hold current accounts. The policy change will definitely boost our business and increase our customer base. We are also expecting to see an increase in deposits,” said Mrs Mbungu.

She said the proposal to allow DTMs to receive and issue third-party cheques would allow customers who acquire loans to complete their transactions in one shop.

Licensing conditions for deposit-taking micro-finance business are also lined up for amendment in the proposed changes to allow for ease in the growth of the DTMs.

“One of the reasons for the low uptake of regulated DTMs is the huge cost incurred while transforming from credit-only to deposit-taking micro-finance business. The proposal is to review the current licensing conditions to adopt a risk-based approach to licensing which will reduce transformation costs,” said CBK.

Other proposals include the creation of a regulation for the credit-only micro-finance institutions to reduce business threat to licensed DTMs and reputational risk for the financial sector.

CBK said that the industry has expressed concern that the fact that there are unregulated credit-only micro-finance entities creates an opportunity for misconduct and poses a threat to the financial sector regulation.