The other day, I received a telephone call from an angry trader who claimed he woke up one morning to discover from the Internet that his name was among those in a list of individuals who had borrowed millions of shillings from a Denmark-based NGO. He said he knew nothing about the money.
“Expose these guys, Jaindi”, the man pleaded, insisting that he was convinced there were many other unknowing small businessmen in Kenya who had found themselves in a similar predicament.
I thought I had come across another pyramid scheme-type operation. But when I checked, I learnt that at issue was a computer-based network run from Copenhagen that had disbursed hundreds of millions of shillings to small-scale businesses in Kenya in less than one year by the name MyC4 .
Initially, my inclination was to dismiss the matter as a non-issue. That was until I gathered that the amounts at stake in this whole operation were not only simply too large to be ignored, but that a system through which hundreds of Kenyans had accessed concession had been subjected to abuse by unscrupulous locals.
One Nakuru-based micro-finance institution alone has received in excess of Sh200 million in less than one year from the Copenhagen-based network.
The problem is that crafty managers of local micro-finance institutions had crafted schemes of contriving fake names to access the money from the network, which they were diverting to other uses. My angry caller was a victim.
Here is a brief description of how the system works. MyC4 is basically an online computer platform where European investors wishing to lend money to small businesses in Kenya and four other African countries, go to identify projects. The money is committed through a bidding process with the investors allowed to bid until each project is fully-funded.
MyC4 has signed agency agreements with local micro-finance organisations to identify and assess small-scale traders looking for loans. The local micro-finance companies receive a pre-determined fee for the service.
Once the local institution identifies the small trader and determines the size of the loan, he uploads the information onto the MyC4 platform where bidding for the project by European investors starts instantly. In a matter of hours, the loan will have been fully funded. In a majority of cases, disbursement will take place in less than two weeks.
Three more points: first, the loan does not sit on the balance sheet of the micro- finance company. Second, the borrower does not transact with MyC4 directly when servicing the loan.
Thirdly, MyC4 does not take deposits or down payments from its loanees.
CLEARLY, THOSE WHO DESIGNED the system left major loopholes for these Lords of Poverty to exploit. The truth of the matter is that some local micro-finance institutions have been uploading one ghost project onto the platform after another — basically using the cash flow for new ghost projects to service the loans for the older projects in an endless game of deception.
Like a pyramid scheme, the game collapses the day the men from Copenhagen and their auditors come into town to scrutinise the loan files or when a decision is taken to suspend the local micro- finance institution from uploading new projects.
Right now, the Danes are engaged in a vicious battle with a local micro-finance institution over whether or not auditors should look at the loan files. In the specific case, the money at risk is close to Sh160 million.
Who bears the brunt? The ordinary man whose name is used in the ghost projects to access the money. Secondly, the deserving small businessman who needs credit. I also blame MyC4. How can you lend such large amounts under such loose arrangements even to entities that are not regulated?
When you look at it critically, the impression you get is that those European investors lending money through the MyC4 platform are philanthropists throwing money at Africa. Or, that since most of the investments are small amounts, the European investors view this thing more or less as a fun game.
What are the policy implications? We need to tighten regulation of micro-finance institutions. Although we passed a law in 2006 to give responsibility of regulating these institutions to the Central Bank of Kenya, the impression one gets is that the existing regulatory regime has tended to concentrate on deposit-taking micro-finance institutions.
The law should stress better corporate governance. A good number of micro-finance institutions are one-man entities operating more or less as consultancies.
With only 19 per cent of the population of Kenya served by the formal financial sector, micro-finance institutions play an important role in the economy.
Let’s weed out these owner-occupier micro-finance institutions and promote growth of a sound and stable micro-finance industry.