Microfinance banks cut lending on Covid default fears

Faulu Microfinance bank in Nyeri. FILE PHOTO | NMG

By OTIATO GUGUYU
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Summary

• CBK report shows  the 14 microfinance banks (MFBs) under its watch recorded negative loan growth of 1.5 per cent.
• Unlike banks, most MFBs serve a large and vulnerable client base and have small balance sheets therefore lack the capacity to absorb huge losses or restructure loans.

Microfinance banks cut lending in the second quarter to June amid fears of default in the wake of coronavirus economic fallout that delivered jobs cuts and closure of businesses.

Central Bank of Kenya (CBK) Financial Stability report showed that the 14 microfinance banks (MFBs) under its watch recorded negative loan growth of 1.5 per cent, without giving the exact value of the disbursed loans.

This was the first negative growth since June 2018 when the micro lenders reported a negative 1.1 per cent loan growth.

The small banks stopped lending to stem a rise in loan defaults as workers were laid off, and small businesses ran out of cash flow to service debts.

Banks saw 13.6 percent or Sh403.9 billion go into default and managed to restructure Sh1.12 trillion indicating industrywide loan servicing problem.

Unlike banks, most MFBs serve a large and vulnerable client base and have small balance sheets therefore lack the capacity to absorb huge losses or restructure loans.

“The microfinance banks (MFBs) have been most affected by the COVID-19 pandemic in terms of their ability to provide credit to the private sector as it has recorded negative growth in the second quarter of 2020 compared to banks and Sacco societies,” CBK said.

The lenders who mostly offer loans to small businesses that have suffered most from restrictions imposed to curb Covd-19 including daily night curfews.

Top banks like Equity and KCB last week reported huge decline in profits as a result of higher provisioning for bad loans. KCB’ 40.4 percent profit decline was caused by a jump in loan loss provisions from Sh5.8 billion to Sh20 billion while Equity Bank’s loan loss provision jump from Sh1.3 billion to Sh14.3 billion saw profits decline 13.9 per cent.

CBK had revealed that the Kenya micro-lenders had suffered a Sh1 billion loss in the year to June during a period when financial institutions have been forced to set aside higher provisions for defaulted loans and restructured over Sh1.12 trillion.

The MFBs, which have failed to turn a profit since 2015, saw their losses drop by nearly a third from the Sh700 million combined loss in the same period a year earlier.

Kenya has three large MFB’s including Kenya Women, Faulu and Rafiki, three mid-sized including Caritas, Sumac and SMEP and smaller ones like Key, Uwezo, Maisha, Century, U&I, Daraja and Choice. Muungano the new entrant was registered in October last year.