By JAMES ANYANZWA

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Kenya’s Central Bank is painting a bleak picture of the stability and growth prospects of loss-making microfinance banks (MFBs), casting doubt on the ability of the institutions to play their intermediation role of bringing savers and borrowers together in the economy.

The banking regulator, through its latest Financial Sector Stability Report (September 2023) shows that the 14 microfinance banks operating in the country have remained weak and vulnerable to even the mildest shocks, given their low level of key indicators.

“The microfinance banks remain weak, thinly capitalised and loss making, diminishing their credit intermediation role,” says Central Bank of Kenya (CBK).

The microfinance banks have between 2016 and 2022 been staggering in loss-making territory, compounded by negative return on assets (Roa) and negative return on equity (Roe).

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Last year, the banks’ total deposits contracted by 7.8 percent to Ksh46.5 billion ($312.08 million).

“Narrowing funding base has significant impact on the subsector’s ability to grow assets, which, in turn raises stability concerns,” says CBK.

Total assets declined by 4.8 percent to Ksh 70.4 billion ($472.48 million), mainly on account of a 3.1 percent decline in gross loans and advances.

“The subsector seems to have not gained from the economic recovery in 2022 as lending declined further, with profit before tax, Roa and Roe recording bigger losses,” says CBK.

The MFBs’ losses increased to Ksh980 million ($6.57 million) in 2022 from Ksh722 million ($4.84 million) in 2021, with only four of the 14 MFBs posting profits. Two MFBs recorded profits of Ksh17 million ($114,090) each, another posted Ksh36 million ($241,610) and one had Ksh131 million ($879,190) in profits.

The remaining 10 MFBs recorded losses ranging from Ksh8 million ($53,690) to Ksh522 million ($3.5 million).

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Credit risk

“Slow growth in loans and profitability raises viability issues of MFBs, especially with new players to targeting low end of the market, especially digital credit providers as well as funding challenges that limit their capacity to lend,” says CBK.

Credit risk remains elevated for MFBs, with gross NPLs rising by 3.1 percent, to Ksh12.5 billion ($83.89 million) in December 2022.

Capital and liquidity levels declined, with four of the 14 MFBs failing to meet capital requirements while two did not meet minimum liquidity ratios.

Overall, the liquidity assets of MFBs declined by 13.4 percent during the period under review.