MFIs ordered to give up Sh1.3bn for cash reserves

Money Markets

Faulu Kenya staff displays the lender’s logo. The firm will deposit Sh455.9 million in CBK following a Treasury order. File 

By GEOFFREY IRUNGU

In Summary

• Traditionally, only banks have been required to observe the ratio.
• The role of the CRR is to serve as a money supply control tool as it can be raised or lowered depending on what amount of cash authorities want to circulate in the market.

Deposit-taking microfinance (DTM) firms will have to surrender at least Sh1.3 billion of their Sh24.7 billion deposits as CBK reserves under an order published by the Treasury Friday.

Faulu Kenya and Kenya Women Finance Trust will give up the bulk of the cash at over Sh1.1 billion. In effect, this significantly reduces money available to the informal sector which patronises the micro-financiers.

Analysts said the requirement will force the DTMs – also known as micro-finance institutions (MFIs) – to raise more working capital as the reserves do not earn interest at the Central Bank of Kenya, yet they could be placed in other institutions to earn fixed returns.

Treasury secretary Henry Rotich said in a Kenya Gazette notice dated July 15 that the DTMs are now subject to the cash reserve ratio (CRR), which is currently set at 5.25 per cent of customer deposits.

“In the exercise of the powers conferred by section 38(6) of the Central Bank of Kenya Act, the Cabinet Secretary for the National Treasury prescribes for purposes of section 38 the microfinance banks set out in the schedule below to be subject to the cash reserve ratio,” said Mr Rotich.

Traditionally, only banks have been required to observe the ratio. The role of the CRR is to serve as a money supply control tool as it can be raised or lowered depending on what amount of cash authorities want to circulate in the market.

The CRR also ensures that banks do not run out of cash to meet payment demands as they arise. To be able to meet depositors’ needs, the CRR can fall to three per cent on any single day but must be no less than 5.25 per cent average in any single month.

Other institutions affected are Rafiki, Remu, SMEP, Uwezo, Century, Sumac and U&I. Financial market players said the regulation introducing the CRR was guided by need to manage the risk associated with the collection of deposits.

READ: Capital demand delays upgrade of micro-lenders

“As you let microfinance institutions grow, you cannot relax risk management. You will do so at your own peril. You need stronger buffers and management and protection for depositors,” said James Murigu, executive director at Metropol Corporation, which undertakes credit ratings, credit reference bureau services and fund raising for clients.

Mr Murigu said that MFIs need more capital in order to grow as they meet the cash reserve ratio.

Robust growth

“They need more capital to be able to grow. It is good for them and for depositors. You do not want a situation where an institution goes down and you cannot pay your customers. And this can happen even with just one large depositor withdrawing their cash one morning,” said Mr Murigu.

An attempt to reach the Association of Microfinance Institution for comment was unsuccessful as the CEO, Mr Benjamin Nkungi, did not respond to emailed queries. The Treasury notice comes on the back of robust growth in DTM deposits.

In the year to December 2013, the sector grew its deposits by 60 per cent at a time when several of the institutions were running campaigns to raise deposits. Any growth in the deposit amounts also means surrendering higher amount to the regulator in reserves.