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, caf├ęs 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.