Big ask for new investors in ending microlenders' streak of losses

Kenya Women Microfinance Bank PLC (KWFT). [File, Standard]

New investors in Kenya’s microfinance banks are in for a tough assignment to forestall further fall in earnings and get a return on their investment.

The new investors who recently bought stakes in several microfinance banks now face a reality check in trying to end a run of over six years in losses.

Going by the performance of commercial banks, Kenya’s financial sector can be said to have recovered from the Covid-19 pandemic. But the same cannot be said of microfinance banks (MFBs).

MFBs have endured over six years of losses and last year was no different even as several of them welcomed new investors to try and stem the poor performance.

There will be no soft landing for the new investors who have up to four years to build value in these MFBs so as to profit when they sell down their stakes to limits permitted by law.

The new investors face tests in overcoming the prevailing streak of losses, eroded capital, shrinking market share and tough aggressive competition from large banks and digital lenders.

This at a time they have spent millions of shillings to buy majority stakes in MFBs, mirroring the trend in the banking sector where several struggling lenders have also been acquired.

In total, five out of the 14 MFBs licensed by the Central Bank of Kenya (CBK) have been acquired.

Central Bank of Kenya (CBK). [File, Standard]

However, a look at the latest financial performance of MFBs presents a stark contrast with that of commercial banks.

The latter’s pre-tax earnings for last year rose by 72.7 per cent to Sh194.8 billion, taking the earnings past the pre-pandemic levels.

The new investors may take years to reverse what MFBs have lost over the years, going by the current performance.

Key Microfinance Bank, formerly Remu MFB, for instance, posted a Sh50.78 million net loss compared with a Sh33.98 million loss in 2020.

The loss presents an immediate assignment for new majority owners, LOLC Mauritius to rewrite the rules of the game and turn the tables on banks and digital lenders that have raided MFBs’ turf to pose an existential threat.

LOLC Mauritius, a firm that is wholly owned by LOLC Holdings - a Sri Lankan firm, said in early February it was going to pay Sh237.41 million for a 73.29 per cent stake in Key Micofinance.

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

LOLC has been successful in revolutionising chamas (informal investment clubs), women’s banking and growing cottage industries and hopes to replicate this in Kenya.

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.

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

The micro-financier’s poor run continued last year as it posted a Sh23.5 million loss compared with a Sh21.23 million loss in the previous year.

Uwezo, another MFB that was in May last year fully acquired by Salaam African Bank — a Djibouti lender has also posted a loss.

Faulu Bank. [File, Standard]

The MFB’s net loss widened from Sh17.52 million to Sh30.59 million last year, marking another low for the firm.

Century MFB, which was also given green light to be acquired by Branch International Ltd, is in a similar situation.

Branch, a San Francisco California-headquartered fintech with offices in Lagos, Mumbai and Nairobi, acquired an 84.89 per cent stake in Century for Sh230 million.

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 steady the earnings of these MFBs and sell the excess stakes at a profit.

SMEP Microfinance, which is also loss-making, is still seeking for a strategic investor to buy an undisclosed stake in the business.

The micro-financier will use the money raised from the deal to fund growth plans over the coming years and also strengthen its capital base.

Large microfinance banks such as Faulu and Kenya Women Microfinance Bank are also not faring any better.

Faulu Microfinance Bank last year returned a net loss of Sh384.64 million compared with a loss of Sh374 million in the previous period.

While Kenya Women emerged from a loss of Sh1.44 billion in 2020 to a Sh115 million net profit, Rafiki MFB returned a loss of Sh150 million last year compared to a loss of Sh152 million in 2020.

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

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