REGULATORY FRAMEWORK FOR THE CREDIT ONLY MICROFINANCE INSTITUTIONS

Kenya has one of the most developed microfinance sectors in Sub-Saharan Africa. By estimation, it serves over six million households.  Over the years, the sector has played a pivotal role in enhancing financial inclusion in Kenya.  Under the Association of Microfinance Institutions – Kenya (AMFI-K) membership, the non-deposit taking microfinance institutions have nationwide coverage. They operate in the rural and urban areas,  serving key economic sectors such as:  agriculture, manufacturing, education, health, water and sanitation among others. Most importantly, besides lending, these players also offer value add services to their customers like financial literacy training programmes.

Following the operationalization of the Microfinance Act, 2008, and despite a push by the non-deposit taking players to be brought under a regulatory ambit in line with Section 3 of the Act; the sector remains unregulated. This is until recently (August 2021) when the National Treasury embarked on the process of developing regulations to specify the non-deposit taking microfinance institutions and prescribe the conduct of their business.

Caroline Karanja is the chief executive officer of AMFI-K. She has a wealth of experience in finance and strategic management. She recently talked to Biashara Leo magazine about the business model of non-deposit taking microfinance institutions (also known as credit only microfinance institutions).   Below are the excerpts:

HIGHLIGHT THE PIVOTAL ROLE THAT IS PLAYED BY NON-DEPOSIT-TAKING MICROFINANCE INSTITUTIONS (MFIS) IN THE SOCIO-ECONOMIC DEVELOPMENT OF KENYA?

A non-deposit-taking microfinance institution (NDTM) is an organization that offers credit services-mainly in small amounts- to its clients. It falls under the tenets of the Microfinance Act – Section 3(2b) – whose regulations are yet to be prescribed by the Cabinet Secretary, National Treasury. In their businesses, NDTM organizations employ mainly touch embedded with technology to serve the clients, especially the rural poor with a clear target on impact and life transformation. NDTMs do not mobilize deposits from the public but take loan guarantee funds from the clients when lending or extending credit because the clients they serve are poor and have no assets to secure their loans:  for instance title deeds, log books or shares.

This category of MFIs mostly targets micro and small enterprises.

Under the AMFI-K membership, NDTMs have nationwide coverage operating both in rural and urban areas in Kenya and serving key economic sectors such as:  agriculture, manufacturing, education, health, water and sanitation among others.

In the last few decades, NDTMs have had a very major impact in the rural areas. By and large, they have contributed to tremendous development in the rural areas where they are the only known form of organized credit. Microfinance has helped the marginalized to access finance and take their children to school, hence breaking the vicious cycle of poverty. Some local value chains can only be developed through microfinance where organizations through donor support have engaged agronomists and played a great role in market linkages.

HIGHLIGHT THE UNIQUENESS OF THE NON-DEPOSIT TAKING MFIS MODEL?

The uniqueness of the non-deposit taking microfinance business model is notable because they offer not only credit but also non-financial services such as client financial education and business management services to individuals and businesses with the aim of empowering and improving their livelihoods. The services offered by this segment of the microfinance sector are impactful. They positively transform lives while   creating wealth and opportunities. Like formal financial institutions, NDTMs have human contact as well as prescribed loan processes and procedures in conformity with the Consumer Protection law and principles.

Another unique feature of the NDTMs (especially the traditional institutions)  is that their main delivery channel  is through group lending. Clients from the communities or the same marketplace form groups and appoint officials. These clients are taken through mandatory training where they are equipped with financial skills and made aware of the lending policies. After the training, they are appraised by the institutional credit officers together with their group officials and then credit is administered on a gradual basis with a co- guarantee mechanism.

AS THE UMBRELLA BODY OF THE MICROFINANCE SECTOR IN KENYA, HOW DOES AMFI-K SUPPORT THE GROWTH OF NON-DEPOSIT-TAKING MFIS?

AMFI-K is a network that was formed in 1999 by the microfinance institutions to help the growth and the development of the microfinance institutions. AMFI-K has for over twenty  years taken the lead to advocate for the microfinance industry helping to mobilize funds, lobbying with the regulators, creating a platform for networking between the players as well as linking the institutions to investors.

AMFI-K’s value proposition is contingent upon the alignment of its core services to the needs of its members and effective delivery. AMFI-K provides the following demand-driven services to its members: policy and advocacy; capacity building for members; research and knowledge management, networking, and linkages. These core services as highlighted below support the institutions particularly the NDTMs who require the support for business growth:

Policy advocacy: This area of activity aims at enhancing collective action by its members and other stakeholders for an enabling policy and regulatory environment for the microfinance sector in Kenya which in return promotes growth and outreach to low-income people.

Capacity building: This area aims at strengthening the capacity of MFIs in delivering appropriate and sustainable microfinance services to low-income people, through the organization and coordination of workshops and training courses as well as effective management information systems, in order to enhance members’ capacity to manage and operate their businesses professionally. 

Networking and linkages: This area aims at providing regular platforms for members to enhance effective collaboration among themselves and with other development actors and relevant stakeholders.

Research and knowledge management: The key objective of this activity area is to provide members with timely and quality research and information that help underpin the policy and advocacy agenda, and facilitate industry product design and decision-making processes. This is an area that promotes immediate value by initiating and promoting interest in research on microfinance, in order to enhance the understanding of the needs of the microfinance sector, support informed policy and regulatory reform, product development and replication, and ultimately improve financial access for the low-income population in Kenya.

WHAT ARE THE BENEFITS OF DEVELOPING REGULATIONS FOR THE NON-DEPOSIT-TAKING MFIS IN KENYA?

The Microfinance Act was enacted in 2008 following the proliferation of the credit entities that mushroomed and had an adverse effect on the financial landscape in Kenya as well as the general public.

Following the operationalization of the Microfinance Act, 2008, and despite a push by the non-deposit taking players to be brought under a regulatory ambit in line with Section 3 (2b) of the Act; the sector remains unregulated until only recently (August 2021) when the National Treasury embarked on the process of developing regulations to specify the non-deposit taking MFIs and prescribe the conduct of such businesses.

Against this background, all financial institutions, including microfinance institutions, are subject to a balanced regulation that promotes efficiency and effectiveness to enhance financial stability and conduct in the market.

Emerging issues and significant areas of concern that necessitate regulation of  NDTM businesses include:  anti money laundering and countering financing of terrorism as well as data security. Other significant areas of concern that will be addressed by these regulations include: consumer protection, credit information sharing, transaction security, curbing financial crime, tax and accounting procedures, transformation of institutions, protecting borrowers from over-indebtedness as well as protecting consumers from abusive practices.

IS THERE ANY APPEAL THAT AMFI-K WOULD WISH TO MAKE TO THE STAKEHOLDERS CURRENTLY ENGAGED IN THE PROCESS OF DEVELOPING THESE REGULATIONS?

Kenya has experienced a proliferation of unregulated digital credit providers who extend much lower aggregate credit compared to commercial banks, microfinance banks and non-deposit taking microfinance businesses. They however have had an adverse social impact through high-interest rates on loans, unethical debt collection practices and misuse of personal data with grave public concerns. This informed the need for CBK to seek an amendment of the CBK Act to provide for licensing and supervision of digital credit providers not regulated under any other written law. 

The CBK (Amendment) Act was assented to on 7th December 2021 and came into effect on December 23, 2021. Under the Amendment, CBK is required to publish regulations within three months of its coming into effect and all persons conducting digital credit business and not regulated under any other written law are required to apply for a license within six months of publication of the regulations.

The CBK (Amendment) Act provides for the following definitions:

Digital channel – means the internet, mobile devices, computer devices, applications, or any other digital system as may be prescribed by CBK;

Digital credit – means a credit facility or arrangement where money is lent or borrowed through a digital channel;

Digital credit business – means the business of providing credit facilities or loan services through a digital channel;

Digital credit provider – means a person licensed by the bank to carry out  digital credit business.

The definitions above as provided under the CBK (Amendment) Act, in effect seem to bring all credit providers not regulated under any other written law, under the ambit of the CBK (Amendment) Act, 2021.

There is however a clear distinction between the Digital Credit Providers (DCPs) and the Non-Deposit Taking Microfinance businesses (NDTMBs). DCPs have digital lending as their model of business without any physical interactions with consumers whereas the NDTMBs use digital channels only as a means of delivery of credit to consumers just like other financial institutions in the sector  including : commercial   banks, microfinance banks, Saccos and  mortgage finance companies among others.

It would therefore be wrong to ignore the existence of the NDTMBs as recognized under the Microfinance Act 2006 given their formal business operation structures and registration and classify them as digital lenders. The attempt to bring this category of NDTMBs under the CBK (Amendment) DCP Act by the mere fact that they are using a digital channel (as defined) without considering other aspects of their business models is wrong and misinformed. It should be noted that the NDTMBs have growth and expansion prospects into formal banking institutions as well as great investment and wealth creation potential, hence having a conducive regulatory framework is a critical component of this cause.

The specification of the NDTMBs that will fall under these regulations will be determined by the annual turnover, sources of capital, annual gross loan book, governance and management structures, number of customers as well as number of staff among other set parameters that are important in promoting financial sector stability.

The Association of Microfinance Institutions in Kenya (AMFI-K) through its membership appeals for the support of the National Treasury to fast-track the finalization of the framework to supervise and regulate NDTM business in Kenya as envisaged in the Microfinance Act 2006.

THE ROAD AHEAD FOR THE MICROFINANCE SECTOR IN KENYA?

The envisaged enterprise growth trajectory for non-deposit taking microfinance businesses is growth that could lead to transition into microfinance banks and possibly into full-fledged commercial banks. Without a regulatory framework, this would derail the envisioned long-term business goal.