Monday, December 22, 2008

Blue acquires its S.A rival firm by Mwaniki Wahome

Blue Financial Services, Africa’s largest micro financier that started operations in Kenya last year has acquired its rival in South Africa.
The firm bought Credit U at a cost of 280 million Rand (Sh2 billion) in a move that will further solidify its market presence in that country.
Trade in Credit U shares was consequently suspended on December 8th and the company’s listing was terminated on Wednesday.
This deal to acquire listed entity Credit U (previously Kagisano Group) was announced in August and concluded this week.
Paved way
Group Chief Executive Officer Dave Van Niekerk said the conclusion of the deal has paved way for the cross listing of the firm in Namibia and Zambia.
“With the conclusion of this deal we can now focus on our dual listing plans in Namibia in the first quarter of 2009) and Zambia in the second quarter ” he said.
Blue Financial Services has set up operations in 12 countries in the continent and its acquisition of Credit U has increased its branches to 300 with over 3000 staff members across the continent.
The company recently announced a $70 million ( Sh19 billion ) loan facility from the Overseas Private Investment Corporation (“OPIC”).
The CEO welcomed the new shareholders who held shares in Credit U during the acquisition who will now be Blue shareholders.

Friday, November 21, 2008

The Dragons' Den, African-style

by Parminder Bahra

It has all the makings of a spoof reality TV show - an African version of Dragons' Den where Westerners invest cash in small African enterprises from the comfort of their living rooms. The Africans pitch their business case to us and we the Dragons offer loans at an interest rate far higher than in the UK. They repay the loans in monthly instalments and we make a tidy profit.
It sounds crass, if not a little shocking. Except that this is precisely what one organisation is doing. Mads Kjaer, the Danish CEO and founder of, believes that poverty can be reduced in Africa if the West views the continent as a business opportunity - one in which loans as modest as €100 (£84) can transform lives.
The idea is alarmingly simple. Through the website, investors put in as little as €5 towards a loan. There are pictures and detailed information about the entrepreneurs seeking financial injections - in most cases the owners of small businesses such as corner shops, cafés or local garages. People such as Steven in Uganda, who is looking for €3,450 to buy a pickup truck for his pig farm. An earlier loan was used to acquire more pigs, which helped his monthly salary rise by €200.
Or Trufena, who runs a modest-looking restaurant near Nairobi, Kenya. Her monthly income - at €90 - is the same as a meal for two in London. But her place is popular and she cannot meet increasing demand. She needs €538 to buy equipment to expand.
The smallest loan request on the site is from Rosaline, who runs a dry-cleaning shop in Kenya. She wants €111 to renovate her premises to attract more customers. She employs one person and will be in a position to employ another if she secures the money.
So how does it work? Once investors have registered and uploaded money into their accounts (by credit card or bank transfer), they can scan the businesses seeking loans and select those that look a good proposition. They then bid to offer a loan at a particular interest rate. The loans with the lowest rates win the auction and the right to supply all or part of the loan.
The winner of the auction becomes a sort of investment banker. The recipient then repays in monthly instalments. The agreed rate is typically between 12 to 15 per cent, but once fees have been added, this works out to about 40 per cent APR.
In each of the countries, there are “providers” - organisations on the ground that screen the businesses and entrepreneurs to ensure that they are in a position to receive and repay the loans.
The providers upload the details on to the MyC4 site. If a borrower defaults, it is unlikely that the entrepreneur will get a chance to pitch for more loans - not least because investors would be deterred by a bad repayment history.
Kjaer says: “When you make your first loan in MyC4 and an e-mail arrives to inform you of the first repayment - you jump up and shout, ‘Heck it works'.”
His first investment was with a Ugandan stallholder who sold small bags in a market. The entrepreneur's customers told him that they had a need for bigger bags and that they'd buy them from his stall. He purchased new stock using the MyC4 loan and has subsequently increased revenues threefold while also employing a helper and opening another stall.
But is it moral for us in the West to make money from people such as Steven, Trufena and Rosaline, who earn only a fraction of our incomes? Wouldn't it be better to give them our money with no strings attached? “Are you patronising the entrepreneur? They don't want charity,” Kjaer says emphatically. “Don't give me fish, give me a fishing rod and I am adding to my life and have fish for ever.” Moreover, unlike donations made to charities, of £100 pounds invested in MyC4, the recipient will see £100.
David Nicholson, a business consultant, was one of MyC4's first investors and has been involved with the company since it started: “When you make a loan with an APR of 30 to 40 per cent, you have to think, ‘Have I become a loan shark?' But this is cheaper than they can get locally.” It is also a better bet than borrowing from a local loan shark.
Kjaer argues that there is a knowledge gap between Western investors and African business people. His website is there to create this relationship. “Africa is not a nutcase - it's a business case,” he says. “It's ironic that we're putting plans together for billions of dollars for Western banks but the rescue plans for developing countries is peanuts.”
He argues that charities and organisations such as the United Nations have been pouring money into the continent, yet it is getting poorer. The MyC4 model is based on the theory of microfinance - small loans, usually of less than €100 - and its founder sees it as an important tool in achieving the Millennium Development Goals (set up in 2000 by the United Nations and signed up to by 190 countries). Microfinance has been successful - Professor Muhammad Yunus, whose Grameen Bank in Bangladesh has provided microcredit to 7.45 million borrowers, 97 per cent of whom are women, won a Nobel prize for his work in the field.
Critics argue that microfinance will not make enough of an impact to lift large numbers out of poverty. Nor do single-person enterprises increase skill levels, unlike larger firms.
Although there are loans that fit the typical microfinance profile on MyC4, Kjaer is hoping to tap into the small and medium-sized enterprise market, where the average loan is €1,600. He points out that these larger firms will create employment if they have the means to expand.
Of course, investors can take their money out of the scheme once a loan has been repaid and realise their profits, but interestingly almost all reinvest their money into new enterprises - less than 0.5 per cent of the €5 million invested so far has been withdrawn. And as with most microfinance schemes, the default rate is very low - around 2 to 3 per cent of total loans, says Kjaer.
According to Nicholson, there are two types of investor: one who offers low interest rates and isn't overly worried about the return on investment; the other is one who sees the loans as a good investment opportunity. The two coexist and use the website for whichever reason they wish to bring their money to the table.
“Money in a share or unit trust is faceless,” he says. “It's interesting and rewarding to look through the opportunities and businesses on”

Tuesday, November 18, 2008

Era of cheap loans ends as State builds up domestic debt
Written by James Makau

November 18, 2008: A growing appetite for domestic borrowing in government has ended the era of cheap credit for consumers culminating into a gradual but steady business model shift in the banking sector.A silent shift in how Kenyan banks are making money — from private sector lending in favour of government — has been going on in the past year, tightening credit lines across the economy.For the banking industry, this change of business model is not only proving profitable but also acting as a shield from the turbulence that has come to characterise the financial markets as the global economy slides into a recession.The pace of increase in Government borrowing has pushed up interest rates, delivering a handy boon for the banking sector. This appetite for borrowing by the government is expected to rise even further as the economy slows down in tandem with global trends and company profits decline, leaving the taxman with less revenue.The situation is not helped by the fact that the government is in the middle of a fiscal year in which it planned for one of the biggest budget deficits in the country’s history. In the past nine months, interest rates on government paper have, for example, moved from an average of seven per cent in January to 8.5 per cent at the end of last week.Coming at a time when lending to individuals and companies had become less profitable and far more risky, the pull of this improvement in rates has been irresistible to the banking sector.And although lending to the private sector still accounts for the largest proportion of total lending by banks, there has been a steady rise in the volume of lending to government in the past six months.
Consumer lending In recent months, this shift in business model has seen banks back peddle on aggressive marketing of consumer loans that characterized the sector in the past four years.And as the Government faces increased pressure to meet its expanded Cabinet requirements and pressing infrastructure spend, higher yields offered through the Treasury Bills and bonds are now in vogue.“The credit risk profile has changed significantly for banks and at the margin new lending decisions have to be made carefully against the ability to pay,” says Mr Robert Bunyi, a financial advisor at Mavuno Capital. He reckons that with a tightening of credit criteria, it is only natural for banks to park excess funds into government paper. While the Kenyan banking sector has somewhat successfully managed to steer clear off the headwinds in the global financial markets, local pressure arising from January’s post election turmoil still haunts lenders.A steep rise in the cost of living over the past 10 months has had the banking sector on toes, as concerns over borrowers’ ability to meet debt obligations build up.

Banks have been pulling back from consumer lending to government paperFaced with increased energy and utility bills as well as rising food prices, Kenyan borrowers have been hard pressed between servicing loans taken and meeting their consumption needs.To cushion against possible loan defaults, banks have marked up their provisions for loan losses, an indicator of lower risk appetite within their ranks. While in some banks the increase of loan loss provisioning has been in tandem with the increase in loans and advances to customers, this higher provisioning has come against a backdrop of slower lending in others.Barclays Bank Kenya has for instance raised its loan loss provision from Sh808 million in June to Sh1.18 billion in September, while Standard Chartered Bank raised its provisioning from Sh148 million to Sh290 million. KCB Bank reviewed its provision for bad debts upwards by 19.5 per cent to Sh1.1 billion while Equity Bank raised its bad debt provisioning by 18.6 per cent to Sh543 million.While KCB and Equity Bank witnessed a rise in loans and advances to customers, both Barclays Bank and Standard Chartered have registered slight declines in loans and advances to customers in the third quarter of the year.
Back to the 90s?Central Bank data shows that the interest rate margin — gap between deposit and lending rates — has halved from 20 per cent to 10 per cent in the last six years subdued by the steady drop in lending margins.Lending rates have dropped from between 25-30 per cent to between 14 and 20 per cent, while deposit margins have risen marginally from an average of four per cent to five per cent as competition for deposits hots up. The drop in the net interest margins has posed the highest risk to earnings for an industry that has posted record profits for five consecutive years.Declining lending margins had been worsened by the bleak outlook on the rate of return on government paper, which previously was the industry’s cash cow. By mid last year, Treasury bill rates had dropped from a high of 15 per cent in 2004 to 6.2 per cent as at last Thursday’s auction. The drop in the interest rates is a result of excess cash in the money market.Over the last three years, the net interest margin has been reducing following the steady decline of lending rates driven by intense competition in the loans market among industry players.Banks have been making money by taking short term deposits at low rates and lending them for longer periods, and at higher rates, to companies and households.As a result, the net interest margin had been steep and the lending business easy.“I think the days of cheap and easy credit will come back, probably in 2010 as the economy stabilises,” says Mr Bunyi.Banking sector analysts say that in the long term the nominal cost of credit should fall as inflation declines.Interest rates should also decline if we as a country finally figure out a stable political architecture that is conducive to private enterprise.“With sustained inflationary pressure in the short term, investors will continue to demand relatively higher yields,” said Mr Edward Gitahi, senior investment manager at AIG Investments. “From a strategic standpoint, players in the banking sector need to be aware of the need to have scale because it enables one to sell a diversified range of financial services, absorb loan losses and address numerous market niches. Also I believe banks have to figure out solutions that would be of interest to small and medium businesses the segments that will see the fastest growth in the medium term,” he said.

Saturday, November 1, 2008

Full disclosure of hidden costs

eastafrican standard

Published on 13/10/2008

By James Anyanzwa

When planning to secure a loan from commercial banks, the most difficult task for a borrower is to decide on which bank charges relatively lower interest rate.

With the cost of living rising everyday a shilling saved on borrowed funds could make a major difference in uplifting the economic welfare of many households.

Even though the actual interest rate on a loan may appear cheaper in the first instance, the borrower ends up paying more on the loan due to additional charges (mostly hidden costs) that are mostly not taken into consideration during the time of loan negotiations.

This perennial inability of loan seekers to decide on relatively cheaper banks could, however, be a thing of the past with the launch of an annual percentage rate (APR) or total cost of credit

APR measure takes into consideration all the extra charges associated with various loan facilities offered by different banks and enables borrowers.

The rate currently widely used in the US, Europe and Australia empowers consumers with a means to compare different credit and loan offers.

APR, which is an all-inclusive measure of the cost of credit, is expected to lower bank charges, which have locked out a substantial portion of the population from accessing credit.

Feasibility study

The Central Bank of Kenya (CBK) in collaboration with the Kenya Bankers Association is working towards introducing this measure.

A South African financial services firm, Genesis Analytics, has won the tender to carry out a study on the feasibility of the instrument in Kenya.

According to CBK, the APR measure study will be Kenya specific.

CBK told Shillings & Sense the study would undertake to analyse key background factors on the demand side to arrive at this measure.

These include among others educational levels, evidence of financial literacy and current financial service usage.

In addition, the banking regulator said the study would undertake a review of experiences in other markets where APR measures have been adopted but take into account the realities of the circumstances in Kenya.

"The study is still ongoing but should be complete by the end of this year," said CBK.

APR is a total cost measure of credit/loan being offered and includes interest rates to be paid and fees associated with a loan.

"The lower the APR, the better the deal for a customer who shops around," says CBK.

APR is designed to provide a standard measure of comparable interest rates for lending (and to a lesser extend saving/deposit).

"There is no standard measure of interest rates in Kenya such as APR or total cost of credit approaches used elsewhere," the bank said.

The move is part of CBK’s efforts to develop and improve competition in the financial sector.

APR is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan.

This includes any additional fees or additional costs associated with the transaction.

Loans or credit agreements can vary in terms of interest rate structure, transaction fees, late penalties and other factors.

A standardised computation such as the APR provides borrowers with an instrument to compare rates charged by lenders.

"Information is a vital element in the development of competitive markets," says CBK.

Based on an earlier survey on bank charges and lending rates launched by CBK in August last year, the costs (excluding additional charges) charged by 20 banks to obtain a loan of Sh50, 000 repayable over a period of two years rose by 0.5 percentage points during the period.

In the higher end of the credit market, interest rate on a loan of Sh500,000 repayable over a three-year period fell 0.01 percentage points.

Expensive banks

The survey showed that Co-operative and Victoria Commercial banks offered the cheapest rates in the lower credit market segment providing loans to the tune of Sh50,000. The two banks both charged a rate of 13.5 per cent.

Dubai Bank and CFC Stanbic (formerly Stanbic Bank Kenya) were the most expensive bank in this segment charging 20 per cent and 20.75 per cent respectively on a similar amount of loan.

Thursday, October 16, 2008


Survey finds fixed rate loans more expensive

Written by Washington Gikunju

Banks that charge interest on loans based on a flat rate calculation method are levying customers substantially higher interest charges than those that use the reducing balance basis, a survey by Central Bank (CBK) has revealed.Releasing the CBK survey on banking charges and lending rates for 2008, the Central Bank director in charge of bank supervision, Ms Rose Detho said on Wednesday that customers should avoid banks that charge interest at flat rates. Alternatively, Ms Detho said such borrowers could negotiate for more favourable terms with their lenders.While acknowledging that some banks could be offering value addition , Ms Detho said the survey was to empower customers by revealing fees and interest rate charges levied by banks. “The objective is to promote transparency and market discipline by giving additional information to customers,” she said. K-Rep Bank is the most expensive lender, with a flat interest rate charge of 18 per cent and additional charges of Sh1,000 and Sh10,000 on Sh50,000 two-year loan and Sh500,000 three-year unsecured loans respectively. A borrower who takes out a two-year Sh50,000 loan from K-Rep Bank ends up paying back Sh69,000, while a borrower who takes out a Sh500,000 three-year loan from the same bank ends up paying interest and additional charges of Sh280,000 on the loan.Family, Equity, Barclays and Imperial Banks also charge interest on a flat rate basis, with a borrower of a two-year Sh50,000 loan ending up re-paying a total of Sh67,500, Sh66,500, Sh66,008 and Sh64,492 respectively in interest and additional charges.This is the third CBK, Financial Sector Deepening (FSD) survey on bank charges and lending rates, which is based on information collected from bankers. The survey was conducted by Research International.FSD Kenya representative Caroline Pulver, said there has been a notable reduction in some of the banking charges since the launch of the survey last year.Victoria, Co-operative and Consolidated banks are the cheapest lenders

Saturday, September 20, 2008

Credit bureaus the way forward for banks in dilemma

Written by Antony Ragui
The increase in oil prices has had a direct effect on inflation
September 19, 2008:
The recent slowdown of the global economy occasioned by the meltdown of the sub-prime mortgage market in the US, the increase in World Oil prices and the ensuing credit crunch has been a major concern for economists the world over.

The issue in the past was would this crisis of the US markets affect our economy? Now we are asking, when will the full effects of this crisis hit our economy and how severe will they be?

The US market being in recession is a reason for other countries to safeguard themselves. Being the largest economy in the world, a slow-down in this consumption due to the credit crunch and recession will have a direct impact on all economies that directly export to US.

In Kenya, the slowing of the US economy as well as the increase in oil prices has had a direct effect on inflation.

The post-election violence led to a disruption of price mechanisms by having a direct impact on supply of goods and services by negatively affecting transport around the country. What does this inflation mean to financial institutions? There is reduced ‘supply’ of deposits as savings reduce and a general increase in cost of living.

Credit demand

On the other hand, there is a corresponding rise in the cost of doing business, leading to an increase in demand for money from these same commercial banks.

What then are the alternatives for banks?

CBK and the government have asked commercial banks to be patient and keep the interest rates constant. So far this has worked, but the lenders will soon be faced with reduced deposits and increased defaults on current loans as global economies slow down.

There is a solution to this: Credit bureau, Credit reference agency, credit information services or credit registries. Developing and developed economies world over have used these institutions to accurately price risk and aid in decisioning by providing a holistic view of the borrower, leveraging on shared information from other industries, and hence creating a robust information system.

Our banks are yet to begin information sharing. In July 2008, the amendment to the Banking Act allowing for licensing of credit bureaus was gazetted. This exercise of sharing of borrowers’ information will not happen until early next year.

In the meantime, banks will have to contend with increased default risk and tightened internal controls as they await the commencement of the legislation and advent of this information age.

Ragui is the managing director, Quest Risk Solutions Ltd.

CBK puts serial loan defaulters on notice

East African Standard

Published on 19/09/2008

By James Anyanzwa

The Central Bank of Kenya (CBK) will formalise operations of the long-awaited Credit Reference Bureaus (CRBs) next week.

The move follows the gazettement of CRB regulations by Finance Minister on July 11.

Establishment of CRBs was part of the Bretton Wood institutions (IMF and World Bank) financial sector reform programme aimed at combating soaring levels of Non-Performing Loan portfolios (NPLs) that had crippled many banks in the 1990s.

"This is a big milestone in the banking industry," John Wanyela, the Kenya Bankers Association (KBA) Executive Director said.

However some market players contend that the new legislation, which limits shared information to only that related to loan defaulters, may not guarantee an optimal growth of the banking industry.

"This law is still limited to sharing information on defaulters only. But for this market to grow, both positive and negative information concerning clients should be shared," a senior director at a local bank told The Standard on Thursday.

The availability and use of credit bureau reports in credit decisions increases the quality of credit decisions and minimises fraud.

CRBs collect and compile detailed information on the payment performance of an individual or a company, basing it on creditworthiness.

Sharing credit information

"With the gazettement of the regulations, the Central Bank of Kenya will now begin to receive applications from viable credit bureaus. CBK will issue licenses and supervise the credit bureaus," Ms Rose Detho, CBK director, Banking Supervision said, last month.

The new regulations will guide the system of credit information sharing and help identify and isolate serial loan defaulters, who account for the huge stock of non-performing loans.

This will enable banks lower the price of credit facilities for borrowers with a good profile.

The transactions between the bureaus and the bank have in the past been underpinned by confidentiality of information, which, if given to a bank, should not be passed on to a third party.

The move to have the CRB legislation in place came in the wake of instability in the banking industry as a result of high default rates reported at Sh101 billion (35 per cent of the gross loans) as at May 2000.

However, the ratio of gross non-performing loans to gross loans declined to 9.5 per cent (Sh58.3 billion) by May this year, according to CBK’s latest monthly Economic Review, mainly due to write –offs and recoveries.

Saturday, August 30, 2008

IFC Says New Credit Law in Kenya Will Ease Access to Finance for Businesses

Nairobi, Kenya, August 26, 2008—IFC, a member of the World Bank Group, today stated that the Kenyan government’s new regulations for credit bureaus will ease access to finance for small and medium enterprises in the country.

IFC advised the government and other stakeholders on developing the new regulations and shared best practices on credit referencing and regulations. IFC also facilitated a study tour to South Africa for Kenyan government and banking officials.

Launched in July 2008 by Kenya’s Minister of Finance, the credit reference bureau regulations provide guidelines for licensing and establishing credit bureau operations. They also define consumer protection rights and make it mandatory for financial institutions to report nonperforming loans. They will become effective in 2009.

“With the announcement of the regulations, the Central Bank of Kenya will begin receiving applications from viable credit bureaus and issuing licenses. We will also supervise the credit bureaus,” said Rose Detho, Director of the Central Bank of Kenya’s Banking Supervision department. “The new regulations will guide the credit information-sharing system and help identify serial loan defaulters, who account for most nonperforming loans. This will allow banks to lower the price of credit facilities for borrowers with good credit.”

“By making it mandatory for banks to share information, the regulations strengthen earlier amendments to the banking act. They also enable private credit bureau operators to apply for licenses to offer their services to the banking sector,” said Wachira Ndege, Chairman of the East Africa Credit Bureau Association.

“Credit bureau operations are vital to building the confidence of the banking sector and for facilitating access to finance for small businesses,” said Jean Philippe Prosper, IFC Director for Eastern and Southern Africa. “The new regulations will provide a framework for a reliable system of credit information sharing, which should give banks more confidence to lend to smaller business.”

Research shows that credit bureaus are critical to expanding credit for individuals and small businesses, and that credit reports increase the quality of credit decisions, while providing significant risk mitigation and minimizing fraud.

Tuesday, July 29, 2008

Nobel winner slams for-profit microfinance


July 28, 2008: 03:45 AM EST

Microfinance summit debates perils of profiting from poor; Nobel laureate against it

NEW YORK (Associated Press) - When Nobel Peace Prize winner Muhammad Yunus began making $27 loans to women in Bangladesh three decades ago, he never dreamed of initial public offerings, return on equity and securitization.
Those terms weigh heavily on his mind today, as the once-charitable field of microfinance has become increasingly commercialized.
"Poor people should not be considered an opportunity to make yourself rich," Yunus said by phone from Bali, Indonesia, where he is attending a microcredit conference, which opened Monday.
The debate likely to rage this week at the Microcredit Summit Campaign conference, a gathering of some 3,600 microfinance institutions and heads of state, including Indonesian President Susilo Bambang Yudhoyono, pits privatization advocates against those who believe you can either save the world or make a buck, but not at the same time.
The pro-market faction argues that civic-mindedness alone will never draw enough capital to serve the estimated billion people who want but don't have rudimentary banking services. They also say that to be sustainable, institutions must be profitable.
Those against commercialization, like Yunus, fear the movement, born of a desire to rescue the poor from loan sharks, is losing its soul, prioritizing investors over the world's farmers, sheepherders, and 'telephone ladies,' many of whom struggle by on less than a dollar a day.
Either way, microfinance is booming. According to Deutsche Bank, the volume of microfinance loans hit $25 billion in 2007, up from $4 billion in 2001, with another $250 billion still needed. The bank expects that private investors, drawn by the sector's social mission, stable returns, low default rates, and potential as a diversification play, will be pouring $20 billion into micro-finance institutions in 2015 -- ten times more than they did in 2006.
Many groups that started as non-profits have become for-profit enterprises, and a plethora of microfinance investment funds, targeted at institutions and individuals, have opened in the last few years.
Citibank, Credit Suisse, Deutsche Bank, Morgan Stanley, and India's ICICI have all entered the microfinance market, either providing direct funding, backing investment funds, or securitizing debt. Private equity investors, including Sequoia, Blackstone Group, Carlyle Group, and Dubai's Legatum, have also piled in, according to the World Bank's CGAP, a microfinance research group.
"It's a big business," Eric Savage, Managing Director of Unitus Capital, a new for-profit firm that will help microfinance groups raise capital, said by phone from Bangalore, India. "You are seeing more and more financially-driven investors going into this market."
As that happens, greater transparency is "critically important," he said. It's the only way to attract capital, and most micro-lenders don't publish standardized annual percentage rates, which can confuse borrowers, he said.
Savage, a former investment banker, said the sub-prime crisis may give microfinance a further boost as investors seek diversification. "The microfinance sector has been relatively isolated from the global credit crisis," he said.
Tightening credit, as banks impose stricter lending rules, has so far had a "quite muted" effect on loans to microfinance institutions, he added.
At least two microfinance institutions are publicly traded: Mexico's Banco Compartamos, S.A., and Kenya's rapidly-expanding Equity Bank Ltd., which on Thursday reported 197 percent profit growth for the first half of the year.
More are making their way to market.
The Compartamos IPO, in April 2007, was a watershed event. The bank raised $474.7 million -- and the hackles of the field's civic-minded pioneers, who say the bank is making indecent profits by charging too much interest.
On Friday, Compartamos reported that net income for the first half was up 13.9 percent, to 500 million Mexican pesos ($49.5 million), over the same period last year. Return on equity fell 11.3 percent, to 39.2 percent.
Compartamos founders Carlos Danel and Carlos Labarthe, argue that microfinance is, first, finance. In an 11-page "Letter to Our Peers," published this year, they argued that high interest rates are needed to cover the cost of administering small loans in difficult markets.
They defended their above-average profits as necessary to attract investors to the still-nascent field, and said they support increased transparency. Competition, they wrote, is already helping the poor: In the past 7 years, Compartamos' interest rates have dropped from 115 percent to 79 percent.
And clients keep coming.
Many, however, remain galled by what Yunus, who won the 2006 Nobel Peace Prize, calls the "distortion" of the field he forged.
The pioneering bank he founded, Grameen, is owned by the poor borrowers it serves, and sustains itself with local deposits. The bank, which hasn't used donor money since 1998, reported a narrow profit of Taka 106.91 million ($1.56 million) on revenues of Taka 10.64 billion ($155.05 million) in 2007.
Such charity, Yunus said, "shouldn't tickle people's greed."

Friday, July 25, 2008

Borrowers face high home loans charges

Written by Morris Aron
Building under construction
July 25, 2008:
Mortgage players are likely to increase their interest rates should the liquidity crunch and rising inflation trends persist, market players have said.

Already, Commercial Bank of Africa has indicated that it will increase its base lending rates by 1.5 per cent from 14 per cent to 15.5 per cent as from August 1.

Some players in the market however maintained that, stiff competition in the home loans industry will delay such revision.

“Any financial institution — particularly mortgage lenders— contemplating revising interest rates will have to tread carefully lest they make a wrong move based on temporary economic situation,” said Beatrice Maingi, the general manager of Stanchart’s secured lending division.

But as the debate on which direction interest rates are bound to go, borrowers for home loans stand to suffer the most due to the structure of their loans, which are to be paid for more than 15 years compared to ordinary loans that last for between two to five years.

For example, if a bank raises by one per cent the interest rate on a mortgage loan of five million shillings— the average price of a middle income house in Nairobi — the borrower will be forced to pay an additional Sh50, 000 per year for the rest of the rest of the payment period, unless there is a downward revision of interest rates.

The head of marketing at CBA Chris Pasha said the increase in base lending rates will affect all products but the final pricing of mortgage loans will be determined at a later date.

Other financial institutions are reportedly waiting for this month’s inflation figures from Kenya National Bureau of Statistics to decide on the direction of interest rates.

Ms Maingi told the Business Daily that as the high inflation rate scenario unfolds and liquidity crunch continues unabated, financial institutions are keenly monitoring the situation with a possible reaction.

“The situation warrants a careful study of the market with a possible review of interest rates,” said Ms Maingi.

Commercial banks are sending strong signals that should the current economic conditions persist and begin to eat into bottom lines of companies, revision of interest rates may be inevitable.

Bankers say that mounting pressure for higher interest rates is the result of high inflation and liquidity crunch that has increased the cost of doing business.

John Wanyela of the Kenya Bankers Association recently told the Business Daily that the pressure is arising from inflation rates that are way above the Central Bank’s target — a clear signal that the prevailing economic conditions are beyond CBK’s control.

Official statistics indicate that the overall 12-month inflation stood at 23.9 per cent in May with the underlying inflation at 2.2 per cent above CBK’s benchmark of five per cent.

But even as inflation continues to bite, other players frown at the rush by some banks to increase interest rates.

Joram Kiarie, business manager at Savings and Loan—the mortgage subsidiary of Kenya Commercial Bank — said any increase in interest rates should be guided by much more market data and not merely inflation rates and liquidity crunches as such phenomenon are known to be temporary.

“Increasing interest rates on credit facilities should be looked at carefully because some products like mortgage loans are long term and their interest rates are arrived at based on a thorough analysis of market trends and a forecast in the long term,” said Mr Kiarie.

Building under construction
Mr Kiarie says that what the economy is experiencing is similar to the situation that prevailed three years ago after the KenGen IPO. This was a scenario where a few banks, that acted as receivers of the IPO, ended up holding too much money at the expense of the others. Mr Kiarie predicts that the crunch will ease off as Safaricom IPO refunds flow back into the mainstream economy.

In the same tune, CBK has sought to calm the nerves of commercial banks with a rider that there is no cause for worry as the situation is expected to ease off once money in possession of four commercial banks that received Safaricom IPO funds are channelled to the mainstream economy. So far, four billion shillings of the Safaricom refund has not reached investors.

CBK has also been quoted in the past saying that inflation rates in the economy could not be captured fully and that no intervention to address inflation will be carried out until the Safaricom IPO refund process is complete.

However, revelations that the refund process is almost complete with only four billion shillings remaining to be disbursed and that Treasury is holding Sh51 billion from the proceeds of the Safaricom IPO has thrown the liquidity crunch and high inflation debate into murky waters.

A section of market players argue that to ease the crunch, Treasury should release the money back - throw the planned budgetary spending - to the mainstream economy as a solution.

If mortgage financiers review their rates, Standard Chartered —one of the mortgage companies with a fixed rate mortgage (FRM) product— stands to win pricing wars but lose out on profit.

Under Stanchart’s fixed rate mortgage launched a couple of years ago, interest is charged on mortgage remains stable for five years even if underlying interest rates are revised upwards.

Most of other mortgage companies have adjustable rate mortgages (ARM), that are tweaked regularly to reflect movements in the market rates.

Mortgage financiers Housing Finance and S&L told Business Daily that they are not contemplating any increase of interest rates on their mortgage products.

Stanchart says, it may consider the move if the trend is left unchecked while other players like CFC Stanbic, I&M chose to remain silent on the matter. CBA however says that, the situation might be temporary, but even then, they have to respond to economic situations.

“We have raised our base lending rates, if the factors surrounding the liquidity crunch and high inflation rate eased then we will also reduce our interest rates,” said Pasha.

Monday, July 21, 2008

Microloans Foster Entrepreneurship in Poor Countries

Microloans Foster Entrepreneurship in Poor Countries

18 July 2008

In many developing countries, micro-financing has created possibilities for burgeoning entrepreneurs who would not have found funding before. VOA's Barry Wood reports that special attention is now being paid to female entrepreneurs, who have had to overcome cultural barriers to get financing. (Part 3 of 5)

The Grameen Bank in Bangladesh is a ground breaker. It lends almost exclusively to women. And its small business loans are almost always paid back.

Nobel Prize-winning Standard

Mohammed Yunus
Muhammad Yunus
Muhammad Yunus is the bank's founder and a hero in his country. Grameen was the first to lend on a grand scale to poor, aspiring entrepreneurs in the developing world. The venture into microcredit won Yunus and his bank the Nobel Peace Prize in 2006.

"It's fantastic news. We are all very excited about the good news. It excites everybody in Bangladesh and also the people who are involved in micro-credit around the world," Yunus said.

Melissa Carrier, at the University of Maryland, says Grameen's micro-financing has expanded the concept of entrepreneurship.

"Certainly Grameen Bank has given legitimacy to those kinds of micro-loans to local villagers," she noted. "And so the idea of entrepreneurship now is about doing for yourself. It's about raising chickens, and having cows, and knitting scarves and being able to feed your family."

Microlending in Kenya

Margaret Okoth
Margaret Okoth
Margaret Okoth runs a market stall in Nairobi, Kenya. She is benefiting from low-interest micro-loans from her village cooperative.

"(The cooperative) has recently increased its limit so that you can borrow 80,000 (shillings)," she said. "And if you take out that big a loan you'll really see your business grow."

In Kenya's post election violence, Okoth's stall was destroyed. But coop loans allowed her to rebuild - and also balance her business with her other job, as a wife and mother of 12.

Now, the Grameen model is being promoted by big lenders like the World Bank, in its discussions with developing countries.

African Issues

Micro-credit can help women like this one, at a market in Sao Tome
Micro-credit can help women like this one, at a market in Sao Tome
Dahlia Khalifa is a business specialist at the World Bank's International Finance Corporation. She says women in African countries face special issues.

"Often times we've seen, and there has been some research done especially in African countries, that women are not given the same consideration as men when they apply for a loan," she said.

That was the case in Egypt. Hoda Galal Yassa is one of Cairo's leading female entrepreneurs. She says women in the Arab world face a formidable barrier.

"Everybody looks at a a good secretary, a good assistant, maybe she can cook very well and make something from that," she said. "But to be a business woman, particularly in the industrial field, it wasn't easy or accepted easily by men."

Yassa started her detergent and other factories with funds from family members.

Women Face Challenges

Elaine Allen
Elaine Allen
Elaine Allen, a professor at Boston's Babson College, says access to capital remains the biggest obstacle female entrepreneurs must overcome, especially in Africa and the Middle East.

"Culturally, they (women) are not able to go into banks and deal with men," she noted. "That is a cultural barrier. And what we're seeing is that micro-finance is one way to get around this. And also we have recommended that banks there (in Africa) hire women."

Discrimination against women goes even further, says Dahlia Khalifa of the World Bank.

"In many jurisdictions, we're sometimes finding that women are treated as legal minors, or they're not able to be a full signatory to a contract, or to represent themselves in court," she said.

Overall, the situation is improving. Men and women entrepreneurs are finding ways to obtain capital. And some governments are beginning to take action to make it easier to do business.

Monday, June 30, 2008

Quest Holdings International partners with Experian to establish A Credit Bureau in Kenya

Experian®, the global information services company, has signed an agreement to supply Quest Risk Solutions, a subsidiary of Quest Holdings International Ltd, with its proprietary software to establish a credit reference database and bureau service in Kenya.

Quest Risk Solutions, as one of the first private credit bureaux in Kenya, will provide valuable decision-making tools to any company or financial institution extending consumer and SME credit in Kenya. Quest will use the Experian software to offer the following services to local businesses:

· Positive and negative credit account information on individuals and SMEs (a very large segment of the Kenyan business population)

· Information on previous credit applications

Kenya’s economy has been growing steadily over the last five years. In the past two years, the economy has grown at an astounding 6.5% and it is projected that the economy will grow at 5% in 2008. Kenya has over 42 banks, numerous MFIs (Microfinance Institutions) and Saccos (Savings and Credit Cooperative Organisations) and in 2007, lending of over 10 billion Kenya shillings was granted. The healthy state of the economy offers an untapped opportunity for the credit bureau business.

The donor community and Kenya’s development partners have noted that the existence of a credit bureau, credit scoring and a credit rating agency is imperative for the growth of the credit industry in Kenya. In that regard the Donor Agencies, particularly DFID are funding the mass education campaign on the value of a credit bureau in the country, through the East African Credit Bureau Association.

Commenting on the agreement, Roberto Giannantoni, Head of Credit Bureau solutions in Experian’s Decision Analytics division, said: “This operation fits our strategic objectives of expansion into exciting emerging economies around the world. Quest Holdings and its CEO, Mr Julian Kyula, have been in the forefront in the establishment of well-run and managed credit bureaus in Kenya. With an exceptional and highly experienced team sourced both locally and internationally, Quest Holdings is in a unique position to succeed in this project with the support of Experian as one of the world’s largest and most successful providers of credit bureau services and solutions for third party operators.

"Lenders need to base their decisions on relevant information about consumers, so automated and sophisticated credit information retrieval systems are key to managing credit risk. The predictiveness of decision making solutions has been enhanced by the introduction of shared credit information via credit bureaux, resulting in better risk management for lenders and improved profitability. Credit bureaux are key enablers for the growth of a nation’s consumer economy and the quality of consumer credit portfolios, whilst protecting the privacy and credit exposure of individual consumers.”

Commenting on the agreement, CEO Mr Julian Kyula, stated: “Experian is clearly the world leader in the provision of credit bureau services and meets all our needs in terms of reliability, ability, support, history of operating and launching credit bureaus in the developing world. For us, Experian is the perfect partner.

“This agreement will go a long way towards cementing our position as the leading provider of financial solutions locally. Our mission is to be the leading credit bureau in East Africa, offering unsurpassed services. We strongly believe that a well developed credit bureau will facilitate and increase the development of financial services in Kenya and the entire East African region”.

Interest waiver on bank loans

If you pay your overdue bank loan through Collection Africa Limited a subsidiary of Credit Reference Bureau Kenya, you stand to qualify for a waiver on all interest accrued. This is according to an advertisement in the Sunday nation of 29th June 2008. The details are scanty but term and conditions apply as expected. This is a great opportunity to 'repair' your credit record.

Coffee fund moves to curb loan defaulting

Publication Date: 6/28/2008

The Coffee Development Fund intends to set up a credit reference bureau to bring down default rates among farmers who borrow from it.

Speaking during the release of five-year strategic plan at the Kenya Institute of Education, the fund’s managing trustee, Mr George Ooko, said the strategy includes plans to bring all financiers of the coffee sector under one umbrella.

“To reduce overall indebtedness of the coffee farmer, we shall partner with Coffee Board of Kenya to set up the registry. In addition, we shall also lobby to stop marketing agents from giving cherry and partchment advances to coffee farmers,” he said.

The problem of indebtedness has plagued the coffee industry beginning mid-1990s following liberalisation that led to some farmers shifting to new players, hence defaulting on loan repayments.

Kenya Planters Co-operative Union is among coffee institutions labouring under the weight of debts and last week, asked the government to bail it out with an injection of Sh1 billion.

Mr Ooko said CoDF would strive to enhance loan repayments and expand funding to post-harvest activities that are currently handled by marketing agents.

He said Sh428 million had been given to farmers in form of advances and credit for rehabilitation out of the Sh600 million provided by the government. He said Sh11 million had already been repaid.

The Coffee Development Fund was set up by the government two years ago to provide sustainable and affordable credit and advances to farmers.

The fund charges a discounted interest rate at 10 per cent per year on a declining balance, and has a one-year grace period before repayment starts.

Tuesday, June 3, 2008

Loan borrowers feel the heat as banks tighten noose

Daily Nation
Publication Date: 5/31/2008

The rush for easy credit in the form of loans and credit cards from banks and micro-finance institutions is causing untold financial and emotional misery to many Kenyans.

Unlike in the past when getting a loan required lengthy procedures, when borrowers had to produce security in the form of land, vehicles and other assets,
lately the only security required is a payslip.

This liberalisation of lending procedures has led to a steep rise in the number of individuals seeking loans.

And although many other factors are at play for defaulting, the leading cause for individual borrowers is imprudent lending and imprudent borrowing by the banks and borrowers respectively.

Security of payslips

Many of these individuals clearly bite more than they can chew — banks are giving out loans on the security of payslips that clearly show that the borrowers’ incomes cannot match the sums advanced.

The other reasons for defaulting include loss of jobs, divorce — particularly in cases where a loan was borrowed jointly by a couple — and high interest rates.

Hard economic times or other calamities, like the election crisis following last December’s General Election, also contribute to defaulting.

Faced with huge debt portfolios, the banks are now engaging the services of lawyers and other debt collectors to assist in the recovery of the lent sums.

Lawyers instructed by banks to recover any such debts from the defaulters are shocked by the failure of borrowers to read between the lines before they sign for the loans.

They give little regard to the contractual implications of the loans they sign up for.

Over and above

For instance, a credit card holder with a limit of Sh50,000 utilises that sum and defaults.

When a lawyer is instructed to demand this sum, over and above the Sh50,000 due on the card, there is interest applicable at commercial rates of about 18 per cent on the principal, which translates to Sh9,000 in addition to a debt collection fee in the region of Sh15,000.

Therefore, at the first attempt of recovery, the defaulter will be required to pay Sh74,000. But many believe that the other charges that inflate the debt are not due.

If the default period increases, the sum is compounded and even becomes more burdensome to settle.

As such, a debt that seems manageable can become so huge and beyond the borrower’s ability to repay — in just four or five years, the Sh50,000 can rise to as high as Sh1 million!

The situation is further compounded where it takes long before a bank takes action to recover any such sum that has not been repaid.

The consequence has always been that any other extra charges that would have accrued pursuant to such inaction by a bank would be paid by the borrower.

In cases where there are disputes which proceed to court, the borrower is condemned to pay all the interest that would accumulate while the case is being heard if a ruling is delivered against him or her.

And the Banking Act has not made any attempts to control interest applicable on non-performing loans.

Therefore, for as long as a borrower is still paying, the rate would vary depending on the vagaries that influence the changes in the cost of loans.

It is only when a loan becomes non-performing that some control on interest chargeable appears to have been imposed.

Section 44A of the Banking Act provides “that the amount recoverable by a bank from a debtor in respect of a non-performing loan shall be limited to:

  • Principal amount owing when the loan becomes non-performing.
  • Interest in accordance with the contract between the debtor and bank, but not exceeding the principal owing when the loan becomes non-performing.
  • Expenses incurred in recovering the loan.
The implication is that the borrower still faces the likelihood of meeting the huge cost of lending.

Consequently, it becomes exceedingly difficult for the average borrower who does not have other sources of income to service these loans.

On many occasions borrowers have resorted to selling some of their valuable assets to offset these loans.

In extreme circumstances where it is established that a borrower does not have sufficient assets, the banks may resort to committing the borrower to civil jail.

The resultant effect is that funds that were clearly intended to be of benefit end up being sources of distress.

Mr Kolla is an advocate of the High Court

Saturday, May 31, 2008


"WHY KENYANS ARE DROWNING IN DEBT" screams last saturdays headline of The Daily Nation. The article goes on to chronicle the bad situation. A casual reader will be tempted to believe that we are in the middle of a debt crises a la sub-prime mortgages. I however think, what we have is the generally accepted industry standard levels of default, that is if you don't include those affected by the post election violence. I am yet to hear of a financial institution that has increased its bad loan provision by more than normal.
The article goes on to relate the unwillingness of insurance companies to compensate for post election loses with the prevailing default rate which is not necessarily true.

Friday, May 30, 2008

Kiva: Improving People's Lives, One Small Loan at a Time

Published: May 28, 2008 in Knowledge@Wharton

Nearly everyone told Matt and Jessica Flannery that their idea -- a website where people could make micro loans to individual borrowers in the developing world -- wouldn't work.

Venture capitalists couldn't see how anyone could make big money on loans as small as a few hundred dollars. And foundations, for their part, wouldn't support something that they saw as commerce, not charity. "We were in this weird social entrepreneurship space, trying to fight perceptions," Matt Flannery recalled. One lawyer friend even told Flannery that the website would be illegal. "He said, 'You can't just send money to someone in Uganda and have [him or her] send it back and have it be okay. If you do that, someone's going to care. Someone's going to show up at your door,'" Flannery said. "I read all the policy and case law on it, and I couldn't find anything that said it was illegal. So we just started doing it."

That decision proved prescient. Today, the website that the Flannerys created -- -- is one of the hottest and hippest on the web. One online commentator compared it to an online dating service, and even Bill Clinton has praised its virtues. Kiva's 270,000 lenders -- people who typically hand over their money, via credit card, in $25 increments -- have funded borrowers in places as far flung as Tanzania and Tajikistan. So far, they have assisted about 40,000 borrowers in 40 countries and provided a total of about $27 million in funding. A wave of international attention came to the practice of micro lending when Muhammad Yunus and his Grameen Bank won the 2006 Nobel Peace Prize for pioneering work in the field.

Kiva, founded in 2005, has been so successful that it has already spawned imitators: eBay last year launched a lending site called MicroPlace. Flannery, Kiva's chief executive, and Premal Shah, its president, spoke about the business and its evolution at the University of Pennsylvania Microfinance Conference.

A Cross between Google and Bono

Kiva mixes the entrepreneurial daring of Google with the do-gooder ethos of Bono, the lead singer of the rock band U2. And with it, the Flannerys have managed to merge two recent socio-economic trends -- social networking and microfinance. Microfinance tries to improve the economic condition of people in the developing world by giving them very small loans instead of donations. It tries to marry the discipline of markets with the charitable spirit of old-style foreign aid.

Like a social networking site, Kiva posts profiles of potential borrowers. Lenders then peruse the profiles and make loans to people whom they find appealing. They can sort potential borrowers by nationality, gender, business type or level of need. African widows tend to draw significant interest, while Central American men -- and butchers -- tend to attract far less. (Lenders can also post their profiles, and Kiva highlights individual lenders and the loans that they have made.)

Once a lender makes a loan, Kiva sends the money to a microfinance institution, or MFI, in the borrower's home country. The MFI -- Kiva has relationships with about 100 -- disburses the funds and works with the borrower to ensure timely repayment. In the language of the banking industry, the MFI services the loan.

Kiva's lenders aren't allowed to charge interest on their loans, and Kiva doesn't charge interest to the MFIs. But the MFIs do charge their developing-world borrowers. This arrangement creates a low-cost funding source for the MFIs while also allowing them to generate money to cover their operational costs. Ideally, a Kiva lender will re-loan his or her money when it's repaid, creating a virtuous circle. According to Shah, "97% of our active loans are on time, and our default rate is less than 1%."

Unfortunately, lenders haven't caught on to the second step in the process. "We have a challenge right now because the people who are getting paid back aren't reloaning," Flannery noted. "They are just keeping the money in their [Kiva] account. Maybe they didn't know it was a loan. Maybe they thought it was a donation. So we have about $3 million right now in the bank just getting float." Kiva's challenge is to prompt them, through emails and notices on its site, to lend again.

Kiva, organized as a nonprofit, makes the money to sustain itself through, in Flannery's words, "tips". Specifically, it asks its lenders to give a voluntary contribution to Kiva each time that they make a loan. "We get about 8%," Flannery said. "So if our lenders lend a million dollars, then we get $80,000 to pay our engineers and programmers." Today, Kiva has a staff of about 25 at its San Francisco headquarters.

The Importance of Good Press

Early on, the Flannerys and Shah bootstrapped the website, paying startup costs out of their own pockets. At the time, Matt Flannery wrote computer programs for TiVo and Shah worked for eBay. They ended up not needing to raise outside money because Kiva began to get mentions in the media. That brought potential lenders flocking to the site. First, blogs like Daily Kos picked up on it. Then the print media and PBS followed, and finally Oprah devoted a segment to it. "Frontline on PBS, that brought us to a 10x level of growth overnight," Flannery said. "And Oprah, that was maybe 10x again overnight."

One writer, New York Times columnist Nicholas Kristof, even went to the trouble of making loans and then traveling to Afghanistan to meet two of his borrowers -- a baker and a TV repairman. "Web sites like Kiva are useful partly because they connect the donor directly to the beneficiary, without going through a bureaucratic and expensive layer of aid groups in between," Kristof wrote.

In fact, the demand from potential lenders has been so great that, in December, Kiva had to turn some away. All of the available loans had been funded. "It was very stressful," Flannery recalled. "People had heard about us on television or the Internet, and yet we had to refuse their money."

The dilemma underscores one of Kiva's behind-the-scenes operational challenges. It won't take just any potential borrower in the developing world; a boot maker in Bolivia can't post his information directly on the site. Kiva only takes borrowers brought to it by MFIs that it has carefully vetted, and it will suspend loans to MFIs whose borrowers have high levels of delinquent loans or whose operations seem shaky. In evaluating MFIs, Kiva considers data submitted by the organizations themselves and by independent third parties, Shah said. Kiva has devised a five-star rating system for the MFIs and shows the ratings, along with profiles, on its site.

"We want to increase the transparency of the process," Shah noted. "We want to give more information on the social performance of the loans and more information on the MFIs." Eventually, as Kiva collects reams of data about MFIs and borrowers worldwide, it could come to serve as something like a credit bureau for the microfinance industry, he said. In theory, its data on each MFI's performance could be valuable, not just to its lenders, but to big backers of micro loans like large foundations, governments and nongovernmental organizations.

In the future, Kiva hopes to track, in addition to repayment patterns, the social impacts of its loans. Shah spoke of creating a scorecard for which Kiva could develop a short survey assessing whether a loan had improved a borrower's social and economic situation. "We could ask 10 or 15 questions like, 'Do you have a tin roof -- yes or no? Do you have a pressure cooker -- yes or no?'" Today, Kiva gathers that sort of information in an ad hoc fashion. It sends volunteer fellows into the field to work with the MFIs. The fellows report back to the home office and also blog about their experiences on the Kiva website.

The fellows program is, in some ways, rooted in Matt and Jessica Flannery's own travels in the developing world. "We went to Africa together right before she went to business school," Flannery said. "We were working in Uganda, and we had this idea to start lending over the Internet." Jessica, who is now Kiva's chief marketing officer, had worked as a consultant to microfinance lenders in Uganda and Kenya. "My wife got really excited about living in Africa, and I was really excited about living in San Francisco. So we had this marriage dilemma. We solved the problem by forming a web-based startup in San Francisco that works in Africa. So my marriage was the real motivator for Kiva.

"At first, we had all of these naysayers. Experts said, 'That's an interesting idea for advertising, but that can't scale. How can thousands of people from Uganda, Cambodia and Tanzania -- random places where the Internet doesn't work so well -- post their pictures and get people to lend to them?' The idea did seem crazy," Flannery noted. "But we weren't thinking it was going to be a multimillion-dollar business. We were thinking it would be our side project. We would see if it worked in Uganda. If it worked there, where there was an Internet café, why might it not work in other places as well?"

Tuesday, May 20, 2008

Investors face harsh reality of securing hefty IPO loans


- Written by Washington Gikunju

Investors applied for bank loans to fund the Safaricom IPO
May 20, 2008: Investors who borrowed bank loans to buy shares during the Safaricom Initial Public Offering (IPO) are considering having to re-pay loans on much lower share allocations than they had applied for, following news that the offer has been highly oversubscribed.

The Safaricom IPO, already billed as the third largest ever in Africa, surpassed only by the Maroc Telecom and Telecom Egypt, offers generated huge interest from investors and banks, who literally set camp on the streets as they competed for investors who needed financing to buy the shares.

Some banks have fixed the re-payment period at six months, meaning that investors will pay interest on the loan for six months, even if they repay the principal in full on the first day the Safaricom shares hit the market.

Despite the relatively huge outlay of Sh50 billion that Treasury targeted to raise from the IPO, preliminary figures from the transaction arrangers show that investors put in over Sh191 million, surpassing treasury’s budget by nearly four times.

Retail investors are known to have gone for bank loans to finance their applications for the shares in droves, pushing amounts received from the domestic investors’ application pool to Sh115 billion, equivalent to an oversubscription rate of 254 per cent.

Some investors applied specifically for Safaricom IPO loans, meaning that any refunds due to them following the oversubscription will go towards offsetting their loans, but others borrowed unspecified personal loans and used the amounts to buy the IPO shares.

Both groups will however be expected to service the loans in full despite projected allocation levels being suspected to be as low as 25 per cent of investor applications.

Some market commentators have said that the huge refunds portend a good secondary market for Safaricom shares which could favour the borrowers, but others say that they will be burdened with having to pay for interest and other charges on loans that did not generate any incomes for them.

It is suspected that investors borrowed billions of shillings from banks to finance their applications, though exact industry figures of the IPO loans are not in public domain.

Equity Bank was one of the leading lenders suspected to have disbursed huge sums, including a publicly acknowledged lumpsum of Sh1.5 billion extended to Safaricom employees for the IPO.

Other banks that were openly offering up to 100 per cent financing for the IPO include Diamond Trust, Transnational, KCB, I&M, NIC, National, CFC and Stanbic.

The IPO loans were given at an interest rate of 15 per cent, plus commitment charges which ranged between one and three per cent. The Safaricom shares were seen to be particularly attractive and a relatively safe bet for both investors and lenders, given Safaricom’s position as the most profitable company in the region and its dominance in the local mobile telephony market.

The transaction advisors now say that retail investors are only likely to get allocations of between 25 to 30 per cent of their share applications, even after factoring in a claw back of 1.5 billion shares from the foreign investors’ application pool to bring total shares available to domestic applicants to eight billion.

This means that applicants will have to pay up to 75 per cent for loans on which they did not receive any share allocations.

The Kenya Bankers Association (KBA) chief executive, John Wanyela, says that re-payment of the loans should not be a problem, especially for those who applied specifically for IPO financing.

Shares as security

This, he says, is because all refunds will go towards knocking off the loans in proportion to allocations, leaving the banks with shares allocated as their security while the borrowers will pay interest on the loans only for the duration held.

“The only borrowers who have to pay for full loans are those who borrowed without specifying that the loans were meant to finance the IPO, otherwise banks had structured their loans in such a way that any refunds would offset the principal amount,” says Mr Wanyela.

Some analysts have also argued that banks may face a backlash from borrowers who will have to grapple with repayments long after the allocation of Safaricom shares on June 9, and especially so if the loans taken were long term.

I&M Bank chief executive Arun Mathur says that most of the IPO loans were short term, adding that investors stand to benefit if the share price appreciates significantly in the secondary market.

Afrika Investment Bank chief executive, Peterson Mwangi, says that taking a bank loan to finance purchase of shares during IPOs is a risk that is only worth taking if there is a good chance that the share price is likely to rise when it starts trading.

Tuesday, May 13, 2008

CBK delays launch of micro-finance rules


Written by Morris Aron
Photo by: Fredrick Onyango
Investors of a collapsed pyramid scheme at a meeting to air their grievances: The new laws will weed out illegal operators.

May 13, 2008:
A legislation meant to rein in pyramid schemes passed last year is likely to come into operation next month.

Deputy CBK governor Jacinta Mwatela said the Micro- Finance Act and Regulations would have come into effect this month, but there were delays at the Government Printer.

The regulations have to be published in the Kenya Gazette, the legal government record, before they can be enforced. The gazette serves as a public notice on legal developments.

“The effective date for the new rules and regulations aimed at accommodating micro-finance institutions into the mainstream financial sector will be pushed forward until the laws are officially gazetted,” said Mwatela.

Once gazetted, the laws specify terms for regulated deposit taking micro -finance institutions to offer a variety of financial services and products, including savings mobilisation, credit facilities and domestic money transfers.

The regulations are expected to increase the number of Kenyans with access to banking facilities and the formal financial market by weeding out illegal operators who last year conned Kenyans out of billions of shillings.

According to the proposed regulations, Micro-Finance Institutions (MFIs) will be required to maintain a liquidity ratio of 20 per cent of all their liabilities. The regulations also require MFIs with offices throughout the country to have a capital base of Sh60 million while those confined to a community will have Sh20 million. The institutions will be expected to seek the approval of the Finance minister for any acquisition of more than 25 per cent of their shares.

Sale of more than 10 per cent of the shares will, however, be possible with the CBK approval. A key aspect of the new regulations is the provision for external auditing of the MFIs. The auditors will be required to communicate any evidence of irregularities or illegal acts by any officer of the institution.

Under the guidelines, MFIs will also be required to make disclosures like those currently obtaining for banks . Loans will be classified as normal, under watch, sub-standard and doubtful depending on the anticipated level of default. The provisions for bad debts attached to the four categories are one per cent, five per cent, 25 per cent, 75 per cent and 100 per cent.

The regulations also forbid MFIs from offering certain financial services such as operating current accounts, foreign exchange trading, investing in enterprise capital, wholesale or retail trade, underwriting or placement of shares.

According to a Finance access survey done in 2006, only 19 per cent of Kenyans are served by commercial banks and Kenya Post Office Savings Bank.

Wednesday, May 7, 2008

Smart cards for borrowers

From Newvision online

KAMPALA - Borrowers from financial institutions will be required to obtain smart cards with records of their loan repayments. The smart financial cards would have their fingerprints, names, number and a photograph. The borrowers will get their cards from CompuScan CRB Limited, a firm that was selected by the Bank of Uganda to run the Credit Reference Bureau. “The bureau will collect loan information from financial institutions, securing, sorting and storing it on the cards,” Sam Katwere, the central bank’s deputy director for communications, said.

CompuScan arrives in Kampala, Uganda, to set up East Africa's first Regulated Credit Bureau

Compuscan has set up offices in Kampala to deliver on its tender award to build Uganda's first credit bureau.

In 2006 CompuScan were selected exclusively for three years by the Central Bank of Uganda to provide credit bureau, risk and identification services to the consumer, SMME and commercial needs of the regulated banking sector.

In addition to the credit bureau, CompuScan, will be responsible for delivering a biometric ID numbering system within the financial sector, and will be responsible for the collection of data from all of the Participating Institutions (including Banks, Micro Deposit Taking Institutions and credit associations) to build the credit bureau.

"The ID number is key to the success of the business", says Mike Malan, Managing Director for Compuscan in Uganda. There is no unique way of identifying a borrower in Uganda. He carries on to say that some checks and balances are in place, such as a photograph and a friend signing that they know you, but impersonation is very easily achieved. The two edged solution will deliver a credit bureau tapping into CompuScan's core strengths and secondly CompuScan will be responsible for delivering the countries first ID numbering system that will initially be ring-fenced for use within the financial sector.

Compuscan's in-house IT team is working with the biometric equipment supply company Sequiam to deliver the biometric ID smart card solution. Compuscan has developed the software that will generate an ID number for every borrower based on the individual's fingerprint. All institutions will have fingerprint and smart card scanners in their branches to identify borrowers.

Equity unveils Sh3bn loan scheme for farmers


Written by Steve Mbogo
Equity Bank building
May 7, 2008:
At least 2.5 million small- scale farmers across the country will benefit from Equity Bank’s low interest rate loans, at a time when most are trying to increase yields to take advantage of the rising food prices in the global market.

The loans are being seen as a short term measure to help the country regain food security after three million bags of maize — a third of the national grain strategic reserves — were destroyed in post-election violence early this year.

The money will be distributed immediately and will be guaranteed with Sh325 million from the Alliance for the Green Revolution in Africa (Agra) and the International Fund for Agriculture (Ifad). The security is meant to cushion Equity Bank against defaults or natural calamities.

Agra, which is funded by the Bill and Melinda Gates Foundation and Rockefeller Foundation, has already committed billions of shillings through its partners to improve small holder agriculture in Africa.

The money will also be loaned to small agricultural activities, especially rural-based endeavours that give farm inputs and extension services to farmers and will also benefit fertiliser, seed wholesalers, grain importers and food processors.

The loans, which are aimed at helping farmers boost their harvests through making it affordable for them to buy fertilisers and other inputs, will attract a 10 per cent interest rate, below the current bank average of 15 per cent.

The new money will help reduce the credit requirements of the agriculture sector estimated to be Sh60 billion, according to President Kibaki.

By end of last year, a total of 25,000 farmers had been given loans totalling over Sh3 billion under the seasonal credit loans scheme, while a further Sh2 billion was disbursed under the enterprise loans scheme.

“To boost these efforts and to ensure that key crops have a sustainable source of development credit, we will increase the Sugar Development Fund from the current Sh3.2 billion to Sh4 billion, and the Coffee Development Fund from the current Sh750 million to Sh2 billion in the next two years,” said the President when he launched the scheme in Nairobi yesterday.

Equity Bank chief executive officer, Dr James Mwangi, said he expected the loan to transform lives through agriculture, explaining farmers would be able to produce and export more yield to take advantage of the high commodity prices.

“China and the rest of Asia have capped their grain exports. This is an opportunity for Kenyan farmers to produce more to take advantage of the high grain demand.”

The scheme by Equity Bank marks its commitment to the agriculture sector, the first time in Kenya’s history that a publicly-owned bank is investing aggressively in farming.

The bank last month entered into a deal with the Eastern Africa Grain Council to pioneer a system known as warehousing receipts that enables the farmer to get cash advance against maize stored under the facility.

The system, operating as a post-harvest technology, is meant to ensure that farmers are not affected by the price fluctuations of grains and eliminates the need for the middlemen.

Over the years, partly due to the inability of the National Cereals and Produce Board (NCPB) — buyer of the last resort — to pay farmers promptly, the latter have opted for the middlemen offering lower prices for the produce.

Dr Mwangi said the bank is also in discussion with the NCPB, the State-run grain handler, to develop a system where farmers will get cash advance against delivery.

In February, Agra partnered with the Tanzania National Microfinance Bank (NMB) to launch a Sh396 million farm input credit scheme to benefit poor farmers and to improve the country’s network of rural agro-dealers.

NMB committed Sh325 million to lend to farmers while Agra and the Financial Sector Deepening Trust provided Sh71 million in a guarantee fund.

Proponents of the warehouse receipt system say that leaving grain handling and storage in the hands of professionals would produce better results and give farmers room to start preparing land early for the next planting season.

Wednesday, April 30, 2008

Banks big winners in Safaricom IPO

From The East African.


Forget the investors and the stockbrokers. Commercial banks, already Kenya’s profit behemoths, are set to be the biggest winners in the Safaricom IPO, raking in millions of shillings in commissions and interest charges.

While the brokerage fees for the entire transaction stand at just Ksh750 million ($11.9 million), analysts say that the banks will make several times this sum because they will benefit from both brokerage fees and from lending.

The brokerage fees, representing 1.5 per cent of the offer of Ksh50 billion ($793 million), are to be paid to the commercial banks and 21 brokerages that facilitated the IPO.

Underlining their expectation of handsome returns, by the close of the offer on Wednesday April 23, the banks, licensed fund managers, and stockbrokers had reportedly collectively spent more than Ksh3.2 billion ($51 million) rolling out additional infrastructure and marketing themselves to the public for the IPO.

Commercial banks, which were appointed by stockbrokers to act as agents for a consideration of three-quarters of the 1.5 per cent brokerage fee, are likely to consider this money well spent, given the additional income from charges and interest, mostly borne by applicants.

Among these were the up-front payment of a commitment fee of anywhere between 1 and 3 per cent, depending on the bank, for all loans issued to applicants for buying the Safaricom shares, as well as the imposition of non-refundable interest charges, which were also being paid up-front. The non-refundable interest was pegged to a non-negotiable fixed period.

Some banks have put this fixed period at six months, meaning that an investor will have to pay the interest on the loan he/she took for six months, even if they repay the principal in full on the first day the Safaricom shares hit the market. This is significant, given that some banks were financing up to 100 per cent of applications.

Another measure that has brought banks handsome income is the imposition on all investors who applied through them of a central depository system fee of Ksh1,000 ($16). The Central Depository System Corporation is said to be following up on these charges, since the opening of CDS accounts is supposed to be free.

Calculations by The EastAfrican show that if a commercial bank were to have lent out Ksh20 billion ($317 million) — as one major player says it has – the combination of these fees could add up to nearly Ksh1 billion ($16 million), with the fees for opening 200,000 accounts alone adding up to a cool Ksh200 million ($3.2 million).

By the end of last week, an estimated 1.7 million people are said to have participated in the Safaricom IPO, although the exact figures are expected to be released this week by Citibank.

More than one million new CDS accounts were opened during the IPO. Many applicants relied on bank loans to make their applications.

Analysts say the Safaricom IPO, in which the Kenyan government is selling 25 per cent of the profitable mobile phone company for Ksh50 billion ($790 million at current exchange rates), is expected to be oversubscribed at anywhere between 150 and 400 per cent.

Retail investors in the region alone are said to have made applications in excess of the targeted Ksh17 billion ($270 million). The retail investors had been expected to buy 3.28 billion shares out of the 6.5 billion reserved for local investors, with the remaining 3.22 billion going to local institutional investors.

This is despite the fact that Tanzania barred its nationals from participating.

Until the offer closed last Wednesday, lead broker Dyer & Blair was hoping to persuade Tanzanian authorities to allow the IPO, in which case it had said it would petition Kenya’s regulatory Capital Markets Authority for a country-specific extension.

The unprecedented number of applicants in the Safaricom IPO, as well as the profits expected to be made by the banking sector, are likely to focus attention on the lack of capacity of the 21 or so active brokerages at the Nairobi Stock Exchange. Without the participation of commercial banks, it is doubtful whether the brokerages would have pulled off a process as massive as the Safaricom IPO.

“Banks traditionally handle about 80 per cent of the big IPOs,” Fred Mweni, managing director of Tsavo Securities, told The EastAfrican. “This is unlikely to change any time soon, and it is preferable that the potential of their day-to-day participation in the stockmarket be regularised.”

While the collapsed Nyaga Stockbrokers, for example, had about 130,000 accounts, indications last week were that Equity Bank, which has branches countrywide, had alone processed about 300,000 accounts for the Safaricom IPO.

The massive amounts of money expected to be made by the banks are also raising concern among financial circles about the legal grey area that is created when the financial institutions virtually double as brokerages and lenders during an IPO.

While all stockbroking fees are regulated by law, there are no regulations, for example, to cover the charges that banks can impose on investors who go through them. In the Safaricom IPO, this lacuna was exploited to charge non-existent CDS fees.

There are also no regulations or directions governing a situation where a bank appointed by a stockbroker to be an agent during an IPO channels all applicants through the appointing broker, irrespective of whether the applicants have accounts with the broker or not.

"The way forward is for the CMA to allow commercial banks to open investment banking divisions, or to push towards acquisitions of existing brokerages so that CMA rules apply across the board,” Mr Mweni said. “The third alternative is to issue new licences to new players to widen the spread of brokerage services around the country.”

Given the size of the Safaricom IPO, and the distinct possibility that the size of future offerings will continue to rise, the Central Bank of Kenya is also said to be contemplating regulations on lending during initial public offers to safeguard customers deposits.