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.