Kenya: Microfinance Sector Under Siege From Banks

Apr 2008
Nairobi, Kenya, April, 23 2008 - The Kenyan media has recently been awash with branch expansion news from the banking sector. Some of the eye grabbing headlines include: "Equity Bank set to open 18 branches across Kenya, Barclays Bank rolls out seven branches in a period of one year, KCB will open 60 branches across the region- 30 of the branches will be in Kenya, Family Bank to roll out six branches, Co-operative Bank to open 20 more branches."

This is real! and shows the level of enthusiasm and confidence the financial services sector has in the Kenyan economy.

The "open new branch" obsession is informed by "the catch-up" strategy, enactment of the Microfinance Bill and the business realities of our times. Globally, research suggest working with the economically active low income persons and giving them a hand as they fight their poverty, is profitable.

The strategy is confirmed by Compartamos (albeit pricing issues) bank in Mexico and our very own Equity Bank. The bank, has within a short time joined the big boys or the " billion club" of banking in Kenya with its unique downscaling business model that caters for the low end, making money with them and from them.

Granted these expansion strategies favour consumers through affordable pricing and innovative products and services, the microfinance industry is set to bear the blunt. Many analysts are wondering whether the microfinance industry will survive for "donkey years" this onslaught. This has further been complicated by the post election violence that hit them most.

The Microfinance sector in Kenya though nascent in comparison with banks has had an impressive growth. Its highly likely that every small trading centre in Kenya has some financial services provider thanks to this innovation. Microfinance is about providing small loans for working capital through use of collateral substitutes to low income entrepreneurs in viable economic activities. The tragedy for microfinance is that its business model is expensive.

The low income access small loans and require frequent monitoring thereby excerbating the institution costs leading to microfinance institutions charging high interest rates, sometimes overpricing themselves out of the market.

While microfinance has been a force for good in reducing poverty, the dynamics in the financial services sector point to an industry under siege. The onslaught by banks goes beyond opening of new branches, it's a new fad, inclusive financial services. Its no secret that the microfinance sector is literally subsidising banks operations in Kenya.

This is all visible by the high staff turnover in microfinance institutions at lending officers level. Microfinance institutions have been reduced to recruitment agents and "training institutes" for the local banks. Yet its expensive to recruit lending staff in Kenya, you have to go through a lot of people to get the right person work for you.

For microfinance institutions to ensure their staff can deliver quality in the field, they invest in staff training. It takes a minimum of three months to effectively train a loan officer and subsequently manage a portfolio. Its expensive and the work is hard. The heartbreak for the microfinance industry is, after a short stint the lending officers join the banks. These are staff who can productively start working the first day of joining the bank.

No wonder, industry commentators believe the current bank growth and drive maybe on the back of other players other than bank managers business prowess.

The direct contribution of microfinance institutions on this front cannot be ruled out. The effect is, microfinance institutions are on hiring mode 24/7, coupled with portfolio exposure and disruptions to their business plans. All this increase the costs of doing business for these institutions. Its no longer business as usual.

Rational successful entrepreneurs tired of weekly, fortnight or monthly meetings propagated by microfinance institutions self-graduate themselves and pitch camp in the banks. Its still prestigious for the unbanked to be a customer of a local bank in Kenya. This comes with status, convenience and other embedded services that microfinance institutions can't, wont provide.

Source : All Africa

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