By Alfred Nyakinda

The Kenya government is soon coming up with a policy that would regulate all microfinance institutions operating in the country. This is likely to disrupt the normal operation of the institutions that have been free from financial directives.

These remarks came during the National Microfinance Conference held in Nairobi in June organised by the Association of Microfinance Institutions Kenya (AMFI) that was attended by representatives from microfinance institutions (MFIs), investors, government officials and other stakeholders to discuss challenges facing the microfinance sector.

Currently, the Central Bank of Kenya (CBK) only regulates deposit-taking MFIs. Non-deposit taking MFIs, categorised as credit only entities, are not regulated by the Central Bank as they lend their own funds.

In a speech read by Gerald Nyauma, CBK Director of Supervision, Dr Patrick Njoroge, CBK Governor, said, “It is worth noting that there is growing concern on the operation of credit only entities, particularly in relation to consumer protection and market conduct.”

These entities are not subject to the same standards as microfinance banks and commercial banks. The concerns raised by the credit only entities are amplified by the rapid proliferation of digital lenders, some of whom exhibit credit only practices.”

Gerald Nyauma, Director of Supervision at the Central Bank reads a speech on behalf of the CBK Governor

According to Dr. Njoroge, it is imperative that all credit providers are subjected to the same consumer protection and market conduct requirements, which is the philosophy that underpins activity based regulation that requires similar products and services to be subject to the same regulatory requirements.

Since the first microfinance bank was licensed in May 2009, their number has increased to 13, with total assets of about Ksh 16.5 billion and deposits of approximately Ksh 40.2 billion as at December 2018.

However, the majority of MFIs fall in the unregulated category and will be affected by reforms currently ongoing in the financial sector on formulation of national policy, including in areas such as credit guarantee and digital finance.

“We are in the process of coming up with regulations that are aimed at ensuring market conduct of the non-deposit taking micro-entities.” said Cabinet Secretary, National Treasury and Planning, Henry Rotich in a speech read by Nelson Gaichuhie, Chief Administrative Secretary at the ministry.

“These reforms are bound to have a positive impact on microfinance as they increase access to credit, improve the channels for delivering microfinance to a green market for raising capital and mitigating the negative impacts of climate change.” he said.

Treasury CAS, Nelson Gaichuhie delivers the Cabinet Secretary’s remarks at the conference

Kenya’s financial sector, which is recognized globally, is one of the priority sectors to enable the achievement of an annual economic growth rate of ten percent.

Access to financial services in the country has expanded rapidly with innovations driving financial inclusion, currently summed at 82.9 percent of the adult population. Presently, the rate of adoption of digital finance in Kenya is considered among the highest in Africa.

Mobile payment systems in particular have brought millions of Kenyans into the banking system. The Cabinet Secretary acknowledged that whereas technology has enabled faster and affordable transactions, it can on the other hand be used for illegal purposes.

In his statement, the CBK Governor noted that in the digital era, the financial sector is moving into uncharted waters with opportunities in innovation that can be tapped to develop and expand microfinance business, but warned there are real risks to the approach such as cyber threats, a borderless society and the disintermediation of finance.

He stated, “The changing environment behooves the MFIs to change or perish. Already significant headwinds are being faced by the MFIs with legacy business models that are not attuned to the digital reality of today’s world.”

In 2015 and 2016, the Kenyan banking sector faced a similar fork in the road moment. The turning point yielded a new normal paradigm shift for the banking sector and it’s now time for a new normal in the microfinance sector.”

Dr. Njoroge further advised MFI’s to prioritise effective business models which are customer centric, stronger governance structures moving from founder mentality to independent boards with varied competencies and clear demarcation of responsibilities, and greater transparency supported by disclosure of risk management, governance in pricing of products and services and compliance with international financial standards.

The government is facing the challenge of protecting both investors and consumers from money laundering, financing of terrorism, fraud and tax evasion, while ensuring risks are managed and the integrity and sustainability of the financial system is maintained.

“There is need for a balance between regulation and innovation; regulation that stifles innovation that benefits the public can not be helpful. There is therefore a need for regulators acting on behalf of the government to be at pace with the new technologies and attendant risks in order to develop regulations that are supportive.” said CS Rotich.

To further support small and medium enterprises, the government is currently trying to pool the Uwezo fund, the Youth Enterprise fund and the Women fund into one entity known as the Biashara fund. This decision was made in order to deal with the problem of risky lenders.

The Treasury is encouraging other investors to pool their resources in the venture, as opposed to the government alone driving it.