A Wake Up Call For Microfinance Banks

Microfinance banks (MFBs) sunk deeper into financial losses last year. Most of the customers with huge deposits for instance flocked to larger commercial lenders in anticipation of benefits from the rate cap law.

A recent report by the Central Bank of Kenya (CBK) shows that the 13 MFBs in the country saw their pre-tax losses increase five times to Kshs. 925 million by the  end of June 2018, compared to a loss of  Kshs. 171 million in June 2017. As a result of the decline in performance, the sector reported a lower return on assets and equity ratio at negative 0.9 per cent and negative 5.5 per cent respectively,  compared to  2016 at negative 0.5 per cent and negative 3.2 per cent respectively, according to the CBK report.

Although the reason for this hemorrhage is not yet clear, experts have attributed it to the increase in the number of mobile lending platforms (fintechs).  These nibble and agile players have eaten into MFBs’ customer base including the informal sector and households.

Unlike commercial banks, MFBs have not been affected by the capping of the interest rate on loans since they operate under the Microfinance Act.  To address the threat that is posed by fintechs,   most commercial   banks have also come up with mobile-lending apps targeting households and small and medium sized enterprises.