Microfinance banks in Kenya recorded a 34 per cent increase in nonperforming loans last year, an indicator of tough economic times faced by borrowers at the bottom of the economic pyramid.

The latest sector report by the Central Bank shows the bad loan book for micro lenders grew to Sh9.91 billion during the year from Sh7.37 billion, meaning customers defaulted 5.8 per cent of Sh43.05 billion, the total loans issued during the year.

Those institutions were also cautious to lend to consumers in the year that was characterised by economic uncertainties brought about by a prolonged dry season and elections. The amount of loan issued shrunk by Sh4 billion. Consequently, the 13 micro finance banks almost doubled their losses to Sh731 million as at December 2017. The sub-sector, dominated by Kenya Women Trust and Faulu Micro-finance Bank at 42.9 and 39.2 per cent of total market share, saw its liquidity shrink 400 basis points to 28 per cent, while customer deposits dropped marginally from Sh40.19 billion to Sh39.41 billion.

Tougher times ahead

The weak financial performance by microfinance banks last year has now forced the CBK to tighten capital margins for the sector to avert failures.

Last week, the regulator published a consultative paper on the review of the microfinance legislation with a view of increasing core capital from current Sh60 million.

“The amendment proposals are intended to promote a more transparent, resilient and stable microfinance banking industry capable of adapting to emerging risks, challenges and opportunities. This will in turn reinforce the financial system stability and contribute towards a more inclusive and sustainable economy,” reads CBK’s statement. It added the new proposals which is open for public participation up to March 15, are also aimed at ensuring the interests of customers are protected, embedding a customer-centric culture. If the capital buffer is pushed upwards, most microfinance banks are likely to be pushed out of market, shrinking credit alternatives for Kenyans at the lower economic scale who are viewed as high risk.


SOURCE: The Star

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