Wednesday, February 27, 2008

Micro lenders face defaults


Written by James Makau

Tousled Treats hair saloon.
February 27, 2008:
The destruction of small businesses in last month’s post- election violence has exposed the soft underbelly of micro finance institutions’ lending strategies, highlighting the need for improved credit risk assessment.

Small businesses, which give a lifeline to many Kenyans outside formal employment, have been the hardest hit with the knock on effect hitting the principal lenders.

Micro-finance institutions loan books are likely to face severe tests in the coming months as the reality of huge defaults and massive write-offs sinks.

“The concentration of lending in most MFIs loan books to specific sectors and locations has exposed them to the possibility of massive write downs,” says Mr Ken Kaniu, the investment analyst at Stanbic Investment Management Services.

MFIs revealed last month that they may have lost between Sh3.75 billion and Sh10 billion, or 15 to 40 per cent of the value of loan repayments estimated at Sh25 billion which have become doubtful.

The exposure is further fuelled by the fact that most MFIs lend locally and some had taken the deeds of physical business premises and land as collateral.

“Focus must shift from collateral-based lending to looking at the viability of the business and the character of the entrepreneur,” says Mr Sam Omukoko, the managing director of Metropol East Africa Ltd.

He says the rating of Small and Medium Enterprises (SMEs) based on parameters such as the character of the borrower and the viability of the business would allow the creation of credit insurance policies, which would move to hedge lenders from credit risk defaults.

“SMEs will be able to access cash not on the collateral they have but on their ability to run a business well enough to meet their obligations.

MFIs are then able to lend to small businesses with the assurance they will get their money in case of any eventuality,” says Mr Omukoko.

A similar model can be drawn from an export credit insurance partnership between the African Trade Insurance Agency (ATI) and NIC Bank in 2005. The facility offered by NIC Bank to ATI was aimed at protecting against financial risk and had the significant advantage in that the agency was no longer required to provide any additional securities such as land or property.

This freed up exporters borrowing capacity allowing them to grow their business.

Unlike banks, MFI’s are not deposit-takers, which limits their capacity to use interest rates to cushion themselves. Since banks are both deposit-takers and lenders, they can choose to raise the interest rates on lending, while lowering interest on deposits.

Although lending institutions have tried to employ the Know Your Customer (KYC) concept prior to lending, they still lack enough information on potential borrowers, limiting their ability to assess default risk.

Rather than focus on the SMEs as a whole, an SME credit tool formulated by Metropol East Africa late last year will score the credit risk of the principals or owners of a start up. “An SME start up is owner-driven. So vetting the person who holds the cheque book rather than the SME itself, gives a more accurate picture of the credit risk,” says Mr Omukoko.

Available statistics estimate that less than five per cent of SMs startups in the country have access to credit.

Largely linked to the low penetration of banking services in the country, lending to startups and individuals has also been slowed down by the tedious processes of sifting through loan applications and the lack of data for lenders to vet potential borrowers.

The high mortality rate of SMEs — estimated at three years — and the high transaction costs involved in lending to startups have also played a part in the failure of banks to lend to this segment.

Monday, February 25, 2008

Credit not the only way out of poverty


Written by Muhota wa kimotho
Photo by: Joan Pereruan
Women sell clothes and artefactsat Nairobi’s Maasai market: It is assumed that loans for business activitieswould help the poor and the marginalised, who are mainly women, to break away from their poverty circle.

February 25, 2007:
During my many years work in microfinance in Africa, in the South East Asia and the Pacific Region (SEAPRO) and my attending many Microfinance conferences/ workshops, in Africa, in US, in Europe and in SEAPRO, it has become clear to me that many microfinance practitioners emphasise and have unwavering faith in the long-term effectiveness of small MF loans, averaging between $100 -$150, the latter figure being on the higher side, as an effective tool of poverty reduction.

It is generally assumed that over time, these small credit facilities (loans) for business activities will enable the poor and the marginalised, who are mainly women, to break away from their poverty circle and to enjoy a range of financial services like the rest of us, which were heretofore unavailable to them..

But, I have second thoughts on the emphasis placed mainly on the credit component of microfinance as a highly effective tool to achieve the hoped for goal. More and more, it has become clear to me that the over-emphasis and narrow focus on availing small loans to the poor and marginalised—especially those poor who have not made prior efforts and/or have had no opportunity to do business before, cannot be considered the answer to achieving meaningful and long-term sustainable poverty alleviation.

In fact, it is clear to me that microfinance is only an intermediation tool for poverty alleviation. To reduce poverty meaningfully, the majority of the microfinance clients must “graduate” to Small and medium Enterprise (SME’s) activities, if our people are truly break way from the poverty circle.

. In various countries on the African content and South East Asia and the Pacific Region, where successful microfinance programmes are in place, microfinance practitioners have made the world of the poor and marginalised less dark and have moved the poor from the level of a mere dream to the level of having hope.

However, we, the practitioners, the donors and all the stakeholders in the microfinance industry, would be doing the poor, the marginalised and ourselves great disservice, if we do not ensure the continuity of the microfinance momentum and strive to make microfinance sustainable in the long-term.

To reduce poverty, significantly and noticeably world-wide, the time has come for all stakeholders—practitioners, support institutions, and donors to go back to the “drawing board” and review the basic assumptions on which the microfinance industry has been built to date.

A critical analysis of our core assumptions, on the basis of the lessons learned during the past 15 years or so of the mushrooming of MFIs in the third word, would, in my opinion, significantly increase the chances of long-term sustainability of the microfinance industry worldwide. The assumptions to be reviewed could include but not be restricted to the following:

We need to view microfinance as a long-term business activity with a social mission, purpose and goal, and recognise, fully, that if the business mission, purpose and goal fail, the social mission will most assuredly also fail.

Accept and genuinely appreciate that business, microfinance or otherwise, is not easy and that not every poor and marginalised person has the wish, the desire, the will, the ability or the capacity to develop into a microfinance entrepreneur.

Regardless of socio/economic status, there are some of us who simply do not have the mind of an entrepreneur and would happily welcome an opportunity to be employed by a successful local microfinance entrepreneur.

For the non-entrepreneur, no amount of credit availability will transform such person into a successful business man/woman, more than buying me a piano would transform me into a successful musician.

Wa Kimotho is an advisor to the Central Bank of Nigeria.

Tuesday, February 12, 2008

Payslip power

Magical power of a payslip
Last Updated on December 10, 2007, 12:00 am

By John Njuguna

Forget the world of plastic money, the real tangible product, which is setting young Kenyans free is a piece of paper called a payslip.

Bankers are courting salaried people like never before and the latest novelty in town is the mortgage scheme, which is making holders of payslips quickly owners of homes. The target group are those between the age of 18 and 65.

This goes against the traditional grain when collateral used to be tangible and immovable assets like land.

The terms are, however, still very tough especially for those operating informally in business despite huge turnovers.

Owning a home has never been made easier with repayment period ranging from one year to 20. With three payslips, a letter from an employer and a down payment of only 10 per cent, one can own a home anywhere in the country, including the exclusive suburbs like Kilimani. The beauty of this product is that interest charged is repayable on a reducing balance.

The biggest challenge would be to sustain this level of income to service the loan.

The same goes for unsecured loans, modelled to suit individual needs, says a mortgage expert with one of the leading banks.

For example, if one is earning a net salary of Sh90,000, he would qualify for a mortgage of Sh3 million. This translates into monthly repayment of Sh44,000 because banks are particular about ensuring one takes home 50 per cent of their salary.

From a layman point of view, a Sh3 million loan would amount to Sh5,375,160 after ten years at a monthly repayment of Sh44,793.

To many this is a large sum of money. But in an era when rent in some estates like Nairobi’s South B rent ranges between Sh25,000 and Sh35,000 for a three-bedroom house, one is only making the owner richer and paying an extra Sh10,000 to eventually own the property is worth it.

Stories often recited by people sent to early retirement by poor health by banks following fluctuating interest rate regime is however not applicable in some mortgage schemes, which is fixed at 13 per cent for a loan lasting between one to 15 years and shots to 13.5 per cent for a 20-year mortgage.

Recently, several old men were debating the new trend of lending. John Kariuki, in his mid 50s was 10 years ago a robust man, who worked hard and life was good. He gambled with a bank loan, secured through his piece of land in Muiki, in the outskirts of Nairobi, as collateral.

This was in the 90s when the economy was on its death bed and a time when interest rates were quite high. However, Kariuki reckoned that there would always be demand for housing in Nairobi, so he invested in a residential housing.

He put up 20 low-cost units which did not attract tenants because they opted for estates closer to the city where they would walk to Industrial Area.

Add the fluctuating interest rates, the then impassable Muiki/Kasarani road and Kariuki’s investment appeared to have been set on quick sand.

Interest rates up

Before long, the bank asked for its money, interest rates shot up and with the land as collateral, Kariuki had to look for money elsewhere to save his land from being auctioned.

Kariuki soon succumbed to high blood pressure, diabetes and hypertension. Mention bank loans and he goes ballistic.

However, his age mates are convincing him to rethink his position about a bank loan to develop the second phase of his Mwiki plot as the area has opened up following the tarmacking of the main road.

Tenants are returning and are demanding good houses unlike the single rooms Kariuki had built.

With the famous Nairobi bypasses being on the development card next year, Kariuki is aware that he can take another gamble which might pay off even it it means providing him with proper medicare.

Banks have come up with long-term mortgage plans which could see the housing boom reach unprecedented level especially in the northern part of the city which still has large tracts of land.

The upgrading of Thika Road from Ruiru, which could ultimately cease traffic congestion, has made this area attractive to investors and people seeking better housing.

But for a man who does business in a very informal way, this might not be easy. Banks are now asking his type to produce audited accounts for the last three years from a business concern which must have been in operation for four years. On top of this, he must produce annual income tax returns.

This is not a tall order for Kariuki. However, he has never employed an accountant and is dodging the Kenya Revenue Authority.

The other requirement is Business Registration Certificate and articles of Association and a trading licence.

Banks predict that once most Kenyans in self-employment learn to operate a formal business, they will be the next target group.

"The idea is to bring sanity in the informal sector where a lot of money exchanges hands and many people tie their money to projects which most of the time take long to complete," said an investment expert.

Meanwhile, the influx of vehicles on Kenyan roads, courtesy of the magical payslip, will soon be competing for space with heavy commercial vehicles.

Many banks are also interested in helping Kenyans to buy vehicles for business with terms being more bearable after the mandatory down payment.

More on intrest rates

Bankers may increase interest rates to mitigate default losses
Last Updated on January 28, 2008, 12:00 am

By James Anyanzwa

Choked by high default risks, the banking industry is considering a way out of the deadlock.

Industry insiders, however, contend that a raise in interest rates features among the most viable options of recouping the losses incurred due to post-election skirmishes.

"At the moment, most borrowers’ loans fall in Grade One and Two, but this situation may change for the worse," say sources.

Grade one loans are those that have securities in place and are serviced normally without risk of default. Grade Two ones have instalments and interest payments lagging behind by one to two months, though banks are still confident they would be repaid.

Grade Three, however, are sub-standard loans as instalments and interests remain unpaid for over three months, forcing bankers to eliminate them from the books while calculating their profits.

"Sub-standard loans are serious to the profitability of the banks," said a top banker.

The banking industry is evaluating the extent of losses incurred in political shocks to decide the suitable response measures.

Disruption of businesses has left banks in a loans servicing crisis because most borrowers are unable to meet their debt obligations.

The banks have been exposed to additional risks related to unpaid debts when the industry appeared to have made irreversible steps towards ensuring asset quality.

High default rates are expected to translate into higher interest rates.

Lending rates have steadily fallen from more than 25 per cent in 2003 to between 10 and 15 per cent currently for secured loans.

Those unsecured at the retail level are between 13 and 19 per cent.

Private borrowing is, therefore, likely to slow down in the first quarter as banks raise rates to recoup losses recorded during the post-election turmoil.

Bankers, Central Bank and the Ministry of Finance are deliberating on the way forward for a sector key for economic stability.

However, the proposal could see private investments fall faster than expected, pushing the once booming economy into a big landing, analysts forecast.

"Banks may have to adjust their lending rates mainly to help support the losses they have suffered," says Mr Samuel Gichohi, an Investment Analyst at Francis Drummond and Company Ltd, a stockbrokerage firm.

"However, bond yields may not change significantly," he says.

Already details have emerged relating to losses incurred by a sizeable proportion of banking institutions through prolonged closures, vandalism of automated teller machines (ATMs) and shattered branches after violence erupted in various parts of the country.

"Banks have suffered substantial losses but are still functional," say sources

"But earlier return to normalcy will help mitigate these effects."

Small and medium sized entrepreneurs (SMEs), a key component of the banking customers, were prime victims of the violence.

Over the past five years, the country’s growth drive had hinged on increased credit to the productive private sectors of the economy, with financial institutions as well reaping from the favourable operating economic environment by registering impressive profits.

Supported by stable interest rates, that currently average roughly 18 per cent, lending to the private sectors of the economy had increased significantly during the period, further boosting the growth momentum.

Economic growth rose to 7.1 per cent by the second quarter of last year from as low as 0.5 per cent in 2003.

NSE, CMA & Nyaga stockbrokers

I believe somebody or an institution is sleeping on their job, how can this happen? Gives credence to not so ethical activities around the NSE. How do you just dish 100m to a company known for dishonest activities? News below from

February 12, 2008: Exactly a year after the dramatic collapse of a stock broker left the investing fraternity reeling with shock and disbelief, a similar crisis was looming at the Nairobi Stock Exchange aided by the complicity of a hesitant regulator.

The broker, however, got a lifeline yesterday after the Nairobi Stock Exchange (NSE) gave it a Sh100 million rescue package to “support investors who had bought shares through it.”

A CMA inspection report indicates that for almost two years, Nyaga has been selling investors’ shares without the their consent, only to restore them after individual customers lodged complaints.
“Following intensified surveillance reviews, it was noted that the company has been illegally selling clients’ shares and buying the same quantity of shares through the normal board,” states a CMA report prepared after the December audit.

The report then details how the broker sells clients’ shares through the NSE prompt board (which takes one day to settle) but then takes four days to settle purchase orders for the same shares through the normal board, in the process bagging all profits that accrue from a slide in prices within those four days.

“This is a manipulative way of temporarily sorting out working capital shortfalls,” says the report. “This therefore means that bank balances change significantly everyday hence the balances may not be reliable.”

Tesco bad cheques

February 12, 2008: Suppliers of a collapsed supermarket store have been left holding on to unpaid cheques of more than Sh7 million after banks declined to pay.

The more than 300 local suppliers said cheques paid to them by Tesco Supermarket, which operated some Uchumi stores under a franchise agreement for a year from 2006, have bounced.

Tuesday, February 5, 2008

CreditKenya expo?

A Credit Kenya expo was planned for Feb 26 & 27,which indeed inspired this blog. I wonder if its still on. Will try to find out though.

I got the following info about the expo from


CREDIT KENYA EXPO is the ultimate window that brings together MSMEs and those
who extend credit to them.

It is envisaged that this initiative will evolve into an annual event where credit
providers can showcase their products and interact with their current and
prospective customers. The broad objective of Credit Kenya Expo is:

To help the MSME SECTOR to have a better understanding of
available credit products and the requirements of accessing such
products effectively.

Many MSMEs are said to be afraid of applying for and accessing formal credit due to
various reasons. These include the insistence by banks for borrowers to provide
collateral, lengthy procedures and turnaround time and the fact that most MSMEs lack
reliable financial data which is key to credit risk evaluation.

The specific objectives of this initiative include:
Provide a platform where Banks can promote their products to the MSME market
segment through interaction with leaders and members of national and regional
MSME sector associations.

Create awareness on MSME ratings as a tool that can assist enterprises to improve
their chances of accessing credit and also negotiate better terms. Ratings can also
serve as a barometer for peer comparison and self-improvement.

Create a platform for Insurance firms to promote their products to the MSME
market. Having insurance (fire & theft) has been found to be a predictive factor in
credit performance in MSME lending.

Create a platform for Mortgage firms to promote their products: (Status of
Residential & Business premises has been found to have a strong predictive value in
MSME lending).

Create a platform where providers of various Training and Capacity building
interventions, aimed at improving the competitiveness of MSMEs, can
interact with MSME sector.

Micro-Finance institutions
Insurance Companies
Housing Mortgage firms
Investment firms
Credit Saccos
Training institutions & related service providers


The conference has space for 300 participants. They will comprise of:-
Representatives of the different associations of the Confederation of Informal
Sector Organizations (CISO)
Representatives of various other trade/business associations (FPEAK, KAM)
Participants drawn from the MSME business sector


Challenges Facing Growth and Development of MSMEs in Kenya
Lending to MSMEs - The Banking Perspective

The Role of Insurance in Growth and Development of MSMEs
Enabling MSMEs to Access Mortgage Finance

Improving the Environment for MSME Lending
- Data Sharing
- Credit Rating/Scoring


Role of Government & Donors in MSME Development
Financial Sector Improvement
- Legislative & Regulatory: SME Act, MFI & Procurement Bills
- Donor Initiatives: Guarantee Schemes
Capacity Building Programmes for Financial Services Sectors vis-a-vis MSME Lending
Alternative Sources of MSME Finance
The Way Forward for MSME Lending

Unsecured loans caution

Banks cautious about unsecured personal loans Print E-mail
Written by Allan Odhiambo
Mr. John Wanyela,
February 5, 2008:
Until late last year, the scramble for private households by banks seeking to maximise their earnings looked unstoppable.

With most middle-class private households seeking to share in the fortunes of economic take-off, banks and other financial institutions saw an opportunity to grow their revenue from lending schemes, mainly through credit facilities such as car loans and mortgages.

This rush translated into premium earnings for the lending institutions because credit terms handed to the households were at relatively higher interest rates than most business enterprises and companies would accept.

Central Bank of Kenya’s November monthly economic review shows that lending to domestic households remained the single largest segment with a share slot of 38.4 per cent worth about Sh27 billion as at September 2007 having grown by Sh7billion over the previous month.

But with the recent wave of violence triggered by the disputed December presidential election results, the future of this key revenue source for banks is now uncertain, with some analysts warning of a possible slowdown amid fears of bad debts should the standoff carry on longer.

Others, however, expressed optimism that the ongoing mediation talks led by former UN secretary-general Kofi Annan would provide a panacea to the turmoil and reverse gains in the sector, hence stalling any major slumps in domestic lending.

“While it is unlikely that banks will be aggressively seeking to grow their lending to domestic households in areas affected by the clashes, it is also very unlikely that they will be foreclosing on such facilities,” NIC Bank managing director James Macharia told Business Daily.

Thousands of households affected by the orgy of violence are seeking funds to reconstruct their lives, but the institutions have remained cautious about seizing such opportunities to generate revenue because of potential risks.

“It is difficult for the institutions right now because a lot will depend on what is going on on the political front, whether it is business as usual or business unusual. Everyone was so positive, but that has turned out to haunt us.

However, it could be too early to tell where things could be headed just yet,” John Wanyela, the executive director of the Kenya Bankers Association said.

Analysts said even as banks remained cautious on future lending to households, numerous measures are already underway to mitigate any possible effects of bad loans that may arise from the disbursements that had already been made before the turmoil set it.

“Banks are positively seeking ways to help customers go through this recovery phase, within the constraints of their own business requirements,” said Mr Wachira.

“How banks assist customers will vary on case by case basis. Such may include rescheduling of loans for longer terms or allowing a moratorium for the payment of principal and interest, enhancement of working capital facilities, conversion of foreign exchange loans to local currency.”

And even as the banks grapple with the dilemma over their lending schemes the State, through the Special Programmes ministry has since established a Sh1billion reconstruction fund to help all affected by the post-election turmoil.

Analysts say the disbursement through the State might be of major assistance especially to households that lost crucial documents such as national identification cards and land title deeds in the skirmishes.

Its mandatory that one produces an ID or other forms of documentation when transacting deals with the lending institutions.

Monday, February 4, 2008

Business as usual?

Things seem to have cooled down after the post election chaos, at least in the city. I wish the Annan team the best of luck, they need it for our sake.

From Lebanon

Bounced Cheques:

A note of warning to our overseas visitors. It may surprise some of our overseas readers to learn that a "bounced" cheque is a criminal offence in Lebanon. The Lebanese newspaper, The Daily Star, today has the following report, which highlights this. It seems somewhat back to front that the Lebanese Parliamentary Justice Committee is suggesting that the crime stays but the drawer's credit rating is not to be adversely affected.

Lebanese banks are required by law to report bounce cheques to the Central Office for Bounced Cheques (Centrale des Chéques Impayes - CCI ) where a customer has not honoured a bounced cheque within 15 days of presentation. Where a customer requires a chequebook the bank must consult the CCI to check if the customer is "blacklisted", before issuing a chequebook. For a customer to remove him/herself they have to make good the dishonoured cheque and once done the bank notifies the CCI. For a first time offence the customer is removed from the list after six months, eighteen months for a second occurrence and thirty-six months for the third time. The blacklist is updated monthly.

"Justice committee modifies law on bad checks"
"The administrative and justice parliamentary committee, presided over by MP Robert Ghanem, held a session on Monday to discuss modifications in law pertaining to writing bad checks. The committee decided that the crime would remain punishable but that writing a bad check would no longer affect the perpetrator's credit. The committee decided to drop the public's right to prosecution for the crime as soon as personal prosecution is dropped. The committee approved of a system in which a check remains a means of payment, not only a line of credit."

A story from Cyprus

Co-op banks to be included on dud cheque blacklist plan

By Athena Karsera

CO-OPERATIVE bank chiefs were yesterday divided in their opinion of a House Finance Committee decision to back a bill that would put cheque-bouncing co- op customers on a blacklist.

Plans for such a list had so far been restricted to commercial bank customers.

The Committee’s decision came during a closed meeting on Monday.

Now that they have been drawn up and agreed by the Committee, both proposals are due to go before the House Plenum shortly.

Co-operative Credit Societies chairman and manager of the New Aglandja Co- op Credit Society Dinos Constantinou yesterday told the Cyprus Mail that the Committee's decision was a positive one.

"Uncovered cheques are a big problem. The Co-operative banks should not be any different from the other financial institutions, there should be the same approach."

He said once the law had been approved, the co-op banks would have to put people systematically issuing bad cheques onto a list. "What happens now is that they leave from one branch and go to another."

Constantinou said that the list would help give a clearer picture of the number and frequency of bounced cheques in Cyprus.

The head of the current accounts department at the Co-operative Central Bank, however, had a different view.

Michalis Iracleous told the Cyprus Mail he did not believe the move would make any difference: "I don't see it working, whatever we put before a Cypriot, he is still a Cypriot."

Iracleous said the move would only prevent prospective cheque-bouncers from opening new accounts at co-operative banks: "The ones that already have accounts will continue like before."

He said it was up to each branch to decide whether to refer to the blacklist or not: "If they do decide to, then there will be progress."

"The only way is for there to be a jail sentence like in Greece. If people knew they would be tried and possibly jailed, they would think twice about writing a bad cheque. We're Cypriots, the authorities have to show us their teeth."

According to the proposal, a bounced cheque will be one that remains uncovered for seven days after it has been written.

Sources said the blacklist would also include liquidated companies, people that have declared bankruptcy and those found guilty of offences similar to bouncing cheques.

The sources said the blacklist would not be open for public access.