The microfinance sector has stands out because of the pivotal role it plays in deepening financial inclusion in Kenya. Nevertheless, the sector’s landscape has in the recent past undergone a lot of transformation largely driven by a new legal regime and uptake of technology. These changes have brought about both threats and opportunities and it is a whole new ballgame in the key sector. To that end, BL magazine recently interviewed Caroline Karanja, CEO, and Association of Microfinance Institutions – Kenya (AMFI-K). Below are the excerpts:
BL: Highlight some of the emerging opportunities and threats in the local microfinance sector?
Caroline: The microfinance sector has witnessed significant growth since 2008 when the first microfinance bank (MFB) was licensed. To start with, the number of licensed MFBs has grown to 13 with a total of 114 branches as at December 2017. In addition, the number of marketing offices has grown to 106 as at December 2017. However, a considerable drop in performance was observed in the year 2017 with the total assets decreasing by 4.6 percent from Kshs. 72 billion in December 2016 to Kshs. 69 billion in December 2017. The level of profits has also declined in the last three years from Kshs. 549 million for the period ended December 2015 to a loss of Kshs. 377 million and Kshs. 731 million for the period ending December 2016 and 2017 respectively. The continued drop in profits is largely attributed to the reduction of financial income.
BL: Highlight some of the challenges facing the microfinance sector?
Caroline: The microfinance sector is currently facing various challenges most of which are as a result of the rapid growth experienced in the last few years and the changing market dynamics. These challenges form the key drivers of change and include starting with the need for enhanced corporate governance structures and practices in the changing banking sector environment. This presents the need to review current shareholding structures and introducing new ones such as non-operating holding companies. Secondly is the need for resilient and viable business models by ensuring adequacy of capital and liquidity given the changing market dynamics across the entire banking sector. The third is the elevated credit risk which has contributed to increasing non-performing loan portfolios.
The other challenge is reduced reliance on deposits and increased reliance on more expensive borrowed funds. This is attributed to the low visibility of microfinance institutions which hinders mobilization of deposits. In addition, the few willing depositors demand for higher interest return, which is not sustainable in the long-run. The sector is also grappling with the need for improved transparency mechanisms and on-demand customer response mechanisms owing to growing consumer complaints.
Moreover, emerging financial technology (fintech) has created new opportunities as well as new risks that need to be understood and mitigated. By the same token, imposition of interest rate caps has led to change in pricing and uptake of credit. The sector has also experienced changes in the reporting standards, including the introduction of the revised International Financial Reporting Standards (IFRS) 9. Donors have also changed their financing models and hence the flow of grants to the sector has been limited. Finally, the regulatory framework in the sector is not inclusive.
BL: How has the sector addressed the threats above – especially cyber-crime?
Caroline: To start with, AMFI-K is addressing the cyber security threat by organizing workshops for the members. The workshops feature a simulation of real world case scenarios, the latest trends in cyber security, the laws and regulations around it and the impact of cyber-attacks. It also covers and equips participants on how to prevent and mitigate cyber-attacks. In addition, we are creating awareness and organizing trainings on the implementation of the IFRS 9. Moreover, we are encouraging financial literacy campaigns by financial providers to enable individuals to embrace technology. Finally, we are partnering with regulators in developing regulations for the sector.
BL: Give us the measures that AMFI-K has recently put in place in order to enhance its service delivery?
Caroline: Financial institutions need to take deliberate actions to be sustainable in order to serve clients’ interests. Though this effort requires time and attention, a balanced management approach benefits both the institution and the clients. There are two key dimensions for implementing responsible finance: client protection and social performance management (SPM). AMFI-K promotes their integration in the member institutions. Client protection is the responsibility of all financial institutions (FIs), while SPM is essential for all double bottom or triple bottom line institutions—those with both financial and social goals. Finally, we are focused on emerging issues that are affecting the operations of our members. These include cyber security, corporate governance and compliance to (IFRS) 9.