MICROFINANCE INSTITUTIONS IN KENYA
A Microfinance Institution (MFI) is a form of financial development that primarily provides financial services to the low income groups and micro and small enterprises (MSEs) which usually lacking access to formal financial institutions in the country.
In Kenya, MFIs are regulated under the Microfinance Act (2006). Under section 3 of the Act, there are two types of MFIs namely:
- Deposit-taking MFIs; and
- Non-deposit-taking MFIs otherwise known as Credit-only MFIs.
Under the Microfinance (Categorization of Deposit-Taking Microfinance Institutions) Regulations (2008), deposit-taking MFIs are further categorized into:
- Community microfinance institutions licensed to carry out deposit-taking microfinance business within the relevant district, city or other specified region approved by the Central Bank of Kenya; and
- Nationwide microfinance institutions licensed to carry out deposit-taking microfinance business countrywide.
A community MFI may be converted into a nationwide MFI with the written approval of the CBK. However, a nationwide MFI cannot be converted into a community MFI.
Note that under section 13 of the Act, a deposit-taking MFI cannot operate outside Kenya.
2.0. DEPOSIT-TAKING MFIs
Deposit-Taking MFIs are regulated under the Microfinance Act and the Microfinance (Deposit-Taking Microfinance Institutions) Regulations, 2008 prescribed thereunder.
2.1. Eligibility Requirements
Under section 4 of the Microfinance Act, in order to be eligible for registration as a deposit taking MFI, the applicant must be:
- A company registered under the Companies Act (Cap. 486) whose main objective is to carry out deposit-taking business; or
- A wholly-owned subsidiary of a bank or a financial institution whose main objective is to carry out deposit-taking business.
However, these requirements do not apply to a duly approved agency conducting deposit-taking business on behalf of a licensed microfinance bank. Where an agency conducts a deposit-taking business on behalf of a microfinance bank, the bank is liable for the acts of the agency in so far as such acts relate to that business.
Deposit-taking business is defined by the Act to mean-
- accepting money from members of the public on current account and payment on and acceptance of cheques; and
- accepting money from members of the public on deposit repayable on demand or at the expiry of a fixed period or after notice;
- employing the money held on deposit or on current account, or any part of the money, by lending, investing for the account and at the risk of the institution including the provision of short-term loans to SMEs or low income
households and characterized by the use of collateral substitutes.
2.2. Licensing Requirements and Procedure
Under section 5 of the Act, a deposit-taking MFI must be licensed by the Central Bank of Kenya. The application is made in a prescribed form. This application must be accompanied by:
- A copy of the Memorandum and Articles of Association or other instrument under which the company is incorporated;
- A verified official notification of the company’s registered place of business;
- The prospective place of operation, indicating that of the head office and branches, if any;
- Evidence that the company meets the prescribed minimum capital requirements;
- Prescribed forms encapsulating information for conduct of the “Fit and Proper” test of the professional and reputational suitability of persons proposed to manage or control the institution;
- The prescribed fee; and
- A report of a feasibility study and three-year business plan of the proposed deposit-taking business in Kenya, detailing the mission, vision, scope and nature of business operations, profitability analysis and internal controls and monitoring procedures, including but not limited to—
- the proposed shareholding structure;
- the proposed organizational structure;
- the domestic economic situation and its relevance for the operation of the proposed institution and an analysis of the financial sector environment and the market to be served by the proposed business company; and
- a schedule of all the preliminary expenses including the institutions costs, all expenses relating to the establishment or transformation of the institution.
Where granted, the license is valid up to the 31 st day of December of the year of issue and may, on expiry, be renewed on application. Where an application for renewal is made, the license is deemed to continue in force until the application is determined.
in deposit-taking MFI
Under section 19 of the Act, no person can hold, directly or indirectly a beneficial interest in more than 25% of the shares of a deposit-taking MFI except where the person is a wholly-owned subsidiary of a bank or a financial institution; or is a company exempted by the Minister.
Further, the Act forbids the transfer of more than 10% of the shares of an institution except with the prior approval of the CBK.
2.4. Duties of a deposit-taking MFI
A deposit-taking MFI is required to maintain a minimum capital of at least 60 Million for a nationwide MFI and 20 Million for a community MFI. Further, deposit-taking MFIs must maintain such minimum holding of liquid assets of twenty per cent of all its deposit liabilities, matured and short term liabilities.
Under section 17 of the Act, a deposit-taking MFI cannot grant a loan or credit facility to an end-user single borrower or his associates where the loan or credit facility, in the aggregate, exceeds the limit of its core capital as prescribed by the Central Bank. Further, it cannot grant a loan or credit facility against the security of the shares of its deposit-taking business. Lastly, insider lending cannot exceed 2% of core capital and aggregate of 20% of core capital.
Three months after the end of each financial year, a deposit-taking MFI must submit to the Central Bank—
- an audited balance sheet, showing its assets and liabilities;
- an audited profit and loss account; and
- A copy of the auditor’s report.
2.5. Prohibited Activities
Section 14 prohibits deposit taking MFIs from engaging in;
- Trust operations;
- Investing in enterprise capital;
- Wholesale or retail trade;
- Underwriting or placement of securities; and
- Purchasing or otherwise acquiring any land except as may be reasonably necessary for the purpose of expanding the deposit-taking business.
3.0. NON DEPOSIT-TAKING MFIs
The Microfinance Act (2006) applies to non-deposit taking MFIs. However, these institutions are registered under eight different Acts of Parliament namely:
- The Non-Governmental Organizations Co-ordination Act (Repealed) e.g. SISDO;
- The Building Societies Act e.g. Equity Building Society (formerly);
- The Trustee Act e.g. Yehu Microfinance Trust ;
- The Societies Act;
- The Co-operative Societies Act
- The Companies Act e.g. Platinum Credit
- The Banking Act; and
- The Kenya Post Office Savings Bank (KPOSB) Act
Credit facilities offered by non-deposit taking MFIs remain substantially unregulated. However, several non-deposit taking MFIs are regulated under sectoral laws albeit minimally. Accordingly, these institutions do not fall under the jurisdiction of the CBK’s microfinance regulation and are thus not subject to the prudential regulations. They are self-regulated by the Association of Microfinance Institutions (AMFI) which is a member-based institution formed in 1999 by leading microfinance institutions.
However, the incorporation of Non Deposit-Taking MFIs into the regulatory framework is currently under discussion by the CBK and a variety of industry stakeholders. It is expected that non-deposit taking MFIs will be regulated under the Microfinance Act (2006). Section 2 (b) of the Act mandates the Minister for Finance to make regulations to control the conduct of the specified non deposit-taking MFIs. These regulations are yet to be put in place. The Ministry of finance is in the process of discussing the best way forward for regulating the non-deposit taking microfinance businesses.
Note however that the Microfinance Act does not apply to financial institutions licensed under the Banking Act; the Building Societies Act; and the Kenya Post Office Savings Bank Act.
From the above, it is noted that deposit taking MFIs are heavily regulated compared to non-deposit taking MFIs which only offer credit services to their members. The rationale for the stringent regulation of deposit-taking MFIs is to protect investor funds and ensure the stability of financial institutions in Kenya. Due to lack of regulation, non-deposit taking MFIs fail to offer guarantee of financial probity to its members and have thus remained unattractive to investors. Further, the limited regulation exposes these institutions to potentially huge losses.
Due to the identified disabilities faced by non deposit taking MFIs, there are discussions to bring these institutions under a comprehensive legal and regulatory framework. In the meantime, with the introduction of the Microfinance Act, several non deposit taking MFIs e.g. Kenya Women Finance Trust (KWFT) have converted to deposit taking MFIs.
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