Microfinance banks (MFBs) are banking on the sale of controlling stakes to foreign firms to end a run of over six years in losses and shore up their businesses.

A streak of financial losses, eroded capital and shrinking market share had given large banks and digital lenders an easier task to beat MFBs but these microfinanciers are not ready to go down without a fight.

Now, MFBs are increasingly turning to new shareholders, mostly foreign-based institutions, through buyouts to get a new lease of life.

Foreign investors are spending millions of shillings to close these deals, which mirror the trend in the commercial banking sector, where many struggling banks have been acquired.

In total, five out of the 14 MFBs licensed by the Central Bank of Kenya (CBK) are being acquired with the majority of the remaining microfinanciers also struggling with losses and thin capital bases.

The Microfinance Act, 2006 does not allow a single person or institution to hold more than a 25 per cent stake in a microfinance firm, but Treasury has been granting four-year exemptions and therefore speeding up the deals.

The exemption means new investors will have up to four years to sober up the earnings of these MFBs and sell the excess stakes at a profit.

Key Microfinance Bank, formerly Remu MFB, has become the latest to announce a buyout deal, deepening such transactions in Kenya’s MFBs space.

But these new owners will have to rewrite the rules of the game and turntables on banks and digital lenders who have raided MFBs’ turf to pose an existential threat.

Key Microfinance has for instance settled for a deal with LOLC Mauritius, a firm that is wholly owned by LOLC Holdings — a Sri Lankan firm.

The firm will pay Sh237.41 million to acquire 73.29 per cent stake in the microfinancier.

Key MFB hopes to ride on the expertise from this new majority shareholder given that LOLC Holdings is a microfinance operator with a presence in eight countries.

LOLC has been successful in revolutionising chamas, women banking and growing cottage industries and hopes to replicate this in Kenya.

LOLC Holdings, which is listed on the Colombo Stock Exchange has a presence in eight countries—Sri Lanka, Cambodia, Myanmar, Indonesia, Philippines, Pakistan, Nigeria and Zambia.

The firm is pledging to invest in a new core banking system and ride on its wide multilateral lending partners to open new credit lines for Key.

Financial technology

Key Microfinance’s move mirrors that of Choice, Century and Uwezo who have all sealed acquisition deals in under 12 months.

Century Microfinance Bank was recently given green light to be acquired by Branch International Ltd.

Branch, a San Francisco California-headquartered financial technology firm with offices in Lagos, Mumbai and Nairobi is getting 84.89 per cent Century stake at Sh230 million.

The Branch and Key Microfinance deals come weeks after Choice MFB was also acquired.

Choice MFB, a Kajiado-based firm started by Kenyans in diaspora, ceded 85 per cent stake to Wakanda Network Ltd — a private limited company incorporated in London.

Uwezo, another MFB was in May last year 100 per cent acquired by Salaam African Bank — a Djibouti lender — as losses weakened its ability to keep up with operations.

SMEP Microfinance last year also announced it was seeking a strategic investor to buy an undisclosed stake in the business.

"The board has made a strategic decision to go to the market for additional long-term funds to support growth plans over the coming years and to strengthen its capital base,” announced the MFB.

The focus will now be on how these new investors will turn around the fortunes of this sector which last posted a combined profit in June 2015.

The MFB’s pre-tax losses more than doubled to Sh2.4 billion in the 12 months ended June 2021 from Sh1 billion loss in the preceding similar period, worsening their woes.

Last year’s performance marked the sixth straight year of losses for the micro-financiers.

They last posted a combined profit (Sh489 million) in the financial year ended June 2015.