Kenya’s microfinance banks (MFBs) are grappling with a challenging economic landscape, according to a report by the Central Bank of Kenya (CBK). The report paints a bleak picture of these institutions, which are currently thinly capitalized, weak, and operating at a loss. This situation casts doubt on their ability to perform their role as intermediaries in the economy effectively.
The CBK’s Financial Sector Stability Report (September 2023) reveals that the 14 MFBs operating in the country have remained vulnerable to even minor shocks due to their low-key indicators. The report states, “The microfinance banks remain weak, thinly capitalized, and loss-making, diminishing their credit intermediation role.”
The MFBs have been on a downward trajectory since 2016, with negative returns on assets and equity. In 2022, their total deposits shrank 7.8 percent to $312.08 million. The CBK attributes this decline to a narrowing funding base, significantly impacting the subsector’s ability to grow assets and raising stability concerns.
Total assets fell by 4.8 percent to $472.48 million, primarily due to a 3.1% drop in gross loans and advances. The CBK notes, “The subsector seems to have not gained from the economic recovery in 2022 as lending declined further, with profit before tax, Roa and Roe recording bigger losses.”
Only four of the 14 MFBs reported profits in 2022, with the MFBs’ losses rising to $6.57 million from $4.84 million. The remaining ten MFBs reported losses between $53,690 and $3.5 million.
The CBK warns that the slow growth in loans and profitability raises viability issues for MFBs. This is especially concerning given the emergence of new players targeting the low end of the market, such as digital credit providers.
Despite these challenges, there is still hope for Kenya’s microfinance banks. Some MFBs have shown signs of recovery and innovation in 2023. For instance, Faulu Microfinance Bank reported a profit after tax of $1.2 million in the first quarter of 2023, up from a loss of $0.9 million in the same period in 2022.
Similarly, Rafiki Microfinance Bank launched a new mobile banking platform in February 2023, which allows customers to access loans, savings, insurance, and other services through their phones.
These examples show that with resilience and innovation, Kenya’s microfinance banks can navigate these economic storms and continue to play a crucial role in promoting financial inclusion.
Source: Business Insider Africa
