Microfinance banks lose deposits to private investment vehicles
Friday May 19 2023
Customer deposits in Microfinance banks have been cannibalised by alternative investment vehicles, which have offered higher returns to customers.
According to new data from the Central Bank of Kenya (CBK) customer deposits in the microfinance sector fell by 7.8 percent to Sh46.5 billion in 2022 from Sh50.4 billion in 2021.
“The decline in deposits was due to the transfer of funds to alternative attractive investments due to the overall increase in interest rates,” said CBK.
Read: Microfinance banks’ pre-tax losses cut to Sh877 million
During the year, instruments such as Treasury bills and bonds offered investors greater risk-adjusted returns in a rising interest rate environment, which served to cushion investors from shocks such as high inflation.
Loss of customer deposits portends liquidity crunches for micro banks who greatly rely on the deposits and borrowings accounting for 66 percent and 13 percent of the banks total funding sources.
Despite the contraction in deposits, deposit accounts inside banks expanded by 15.3 percent to hit 3.071 million accounts from 2.665 million accounts in 2021.
Microfinanciers, nevertheless, lost high-value accounts as the number of deposit accounts with more than Sh100,000 each plunged by 3.8 percent to 24,257 accounts in the year.
In contrast, the number of deposit accounts with less than Sh100,000 surged by 15.4 percent to 3.047 million.
At the same time, commercial banks and digital lenders ate into the microfinance banks’ loan books as net advances in the sector fell by 1.9 percent to Sh39.3 billion from Sh40.1 billion previously.
Lending, however, remained the largest activity undertaken by the micro banks with the net loan portfolio accounting for 56 percent of the institution’s total assets.
The reduced loan book is partly attributable to the reset of income downwards as Kenya’s 14 microfinance banks’ saw their net loss for the year expand by 77.5 percent to Sh1.3 billion.
Income in the period dropped by 1.6 percent to Sh13.18 billion while expenses rose by 1.3 percent to Sh13.1 billion.
Only four of the 14 microfinance banks posted profits in the period including Smep, Caritas, Sumac and U&I Microfinance.
Microfinance banks’ net assets eased by 4.8 percent in the period on the back of loan book attrition to Sh70.4 billion.
Read: Digital lenders train sights on struggling small banks
Other asset classes including cash balances, government securities and net fixed assets also fell throughout 2022.