Microfinance banks’ losses surge amid need for capital injections

Central Bank of Kenya building in Nairobi

Micro-finance banks (MFBs) faced a tough terrain last year as the search for profits eluded more than half of the institutions.

Data on the 10 out of the 13 MFBs regulated by the Central Bank of Kenya (CBK) for the year ended December 31, 2017 shows that six of them suffered losses while one saw a decline in profits.

This is even as the interest paid on deposits rose. Like commercial banks, the MFBs also applied brakes on lending as non-performing loans piled pressure on their ability to offer credit.

Maisha Microfinance Bank had another bad year, posting a loss of Sh39.8 million.

This was a 28 per cent widening from a loss of Sh31 million in the previous year, despite growing its income from Sh9.7 million to Sh42.7 million on account of increased lending.

The microfinance expanded its loan book six times to Sh155.6 million to grow its interest income from loans portfolio. However, with deposits also tripling from Sh78 million to Sh230.8 million, the expenses of holding such deposits increased.

Maisha incurred Sh12.3 million on interest and fee expense on deposits being six times more than the cost in 2016.

Core capital

Total expenses hit Sh89 million, sending the microfinance into a loss. The MFB is required to maintain at least Sh60 million as core capital.

However, by end of December last year, the core capital dropped from Sh88.9 million to Sh43 million, below the CBK threshold.

This even as gross non-performing loans increased from Sh1.1 million to Sh15.9 million, further piling pressure on its ability to lend more.

Choice Microfinance Bank founded by diaspora based Kenyans also found the going tough.

It registered a loss of Sh53.9 million, an increase of 54 per cent from a loss of Sh39 million in the previous year.

The Kajiado County-based microfinance grew its interest on loan portfolio by 95 per cent to Sh13.4 million to lift its total income to Sh18.6 million.

However, its expenses grew by 17 per cent to Sh69 million, denting its ability to return a profit.

It paid Sh7 million as interest and fee expense on deposits nearly three times the expense in the previous year.  According to the bank’s financial statements, the loan book dropped by 10 per cent or Sh3 million to Sh31 million as deposits rose by seven per cent to Sh27.5 million.

The MFB’s liquidity ratio dropped from 33 per cent to 10 per cent below the CBK minimum required ratio of 20 per cent.

Choice MFB’s core capital dropped to negative Sh8.4 million, also making it breach all the capital ratios. It will require additional Sh28.4 million to attain the minimum required level of capital to run a community-based microfinance.

The dip in capital dents its ambition to raise Sh60 million and convert into a national microfinance.

Daraja MFB, mainly owned and run by business people in Dagoretti, saw its loss widen by 67 per cent to Sh46.9 million.

This is despite growing its total income from Sh17.2 million to Sh20.2 million.

Operating expenses plunged it into another loss. The MFB’s expenditure on deposits doubled to Sh8.7 million. During the period, deposits grew by 12 per cent to Sh95.2 million.

However, it expanded its loan book by just 4.2 per cent to Sh53 million, leaving it with huge deposits to pay interest on.

This upped total expenses to Sh79.8 million, up from Sh62.6 million. Gross non-performing loans and advances hit Sh10.8 million from previous year’s Sh6.8 million inhibiting its ability to lend more.

Its core capital has been depressed from Sh48.4 million in 2016 to just Sh6.58 million, making it breach the CBK threshold of maintaining at least Sh20 million.

Its liquidity ratio dropped from 70 per cent to 24 per cent, being just four percentage points above CBK requirement.

Catholic-owned Caritas Microfinance Bank cut its losses by Sh2.5 million to Sh70.9 million. It doubled its total income to Sh88.1 million, boosted by a more than four times growth in its interest income from loans portfolio.

However, expenses also grew by 42 per cent to Sh158 million.

During the year, customer deposits grew by 97 per cent to Sh564 million leading to a 78 per cent jump in expenses on the deposits to Sh16.8 million. Caritas is well-capitalised.

Its core capital stood at Sh273 million, comfortably above CBK’s minimum requirement of Sh60 million. Liquidity ratio was at 20 per cent.

Another church-owned microfinance lender, SMEP, recorded an improved run cutting its losses by 76 per cent to Sh31.7 million.

In the previous year, it had suffered a loss of Sh134.5 million.

It left its loan book almost unchanged at Sh1.7 billion even as gross non-performing loans also remained flat at Sh315.7 million. Total income dropped from Sh569 million to Sh562 million.

However, it managed to cut expenses by Sh47 million to Sh616 million. Finance cost also dropped by 74 per cent to Sh54 million to help it reduce losses.

Its total capital to total risk weighted assets is at 14 per cent, being two percentage points above CBK threshold.

Pressure will pile on MFBs whose capital position is below CBK. In February, as CBK - backed inquiry recommended that capital ratios of micro-lenders be raised to a new level.

The proposal to increase the capital requirements was to ensure that applicants and licensed MFBs demonstrate resilience as evidenced in their capitalisation.

“The proposal is to have the minimum capital requirements for all microfinance banks increased for both existing MFBs and new entrants,” CBK said.

The proposal also calls for scrapping of classifying MFBSs as nationwide and community-based but instead issue one licence for all MFBs.

This will put pressure on community MFBs to raise fresh capital. Last month was the deadline for receiving comments from the public on the proposals to the Microfinance (Amendment) Bill, 2018, and Regulations.

For Uwezo MFB, the year proved difficult, sending it into a loss of Sh9.4 million from a profit of Sh4.1 million in 2016.

Its total income shrunk from Sh56 million to Sh46 million even as expenses rose by Sh5 million to knock it out of profit zone.

Loan book

Interest from loans dropped by more than one third to Sh25.4 million as the MFB’s loan book shrunk by 24 per cent to Sh126 million. This, even as deposits grew by two per cent to Sh29 million made the cost of using the deposits nearly triple.

Sumac MFB, which announced in January that it has mobilised Sh375 million in fresh capital saw its profit shrink from Sh14 million to Sh4.6 million on account of increased expenses. While its total income grew by Sh31 million to Sh231.6 million, expenses ate into this gain. Staff costs and rental charges rose, so did interest and fee expense on deposits which jumped by 51 per cent to Sh45.3 million.

Kenya Women Finance Trust registered an 83 per cent drop in net profit from Sh240 million to Sh41 million in a year that saw its income decline.

Faulu MFB lived up to its name to enjoy a stable run by posting a more than double (112 per cent) growth in profit to Sh104 million.

Despite its total income dropping from Sh4.8 billion to Sh4.6 billion, Faulu trimmed its expenses to Sh3.9 billion from Sh4.3 billion in the previous year, a 9.3 per cent change.

It however registered negative credit growth of 5.6 per cent as gross non-performing loans increased.

The results not captured in this analysis are those of Century, Remu and Rafiki MFBs.

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