Fintech firms step up investment in Kenya’s microfinance space

Microcredit banks in Kenya are attracting foreign online middle-finance firms seeking a foothold in the East African nation’s vibrant fintech ecosystem.

This comes against the backdrop of Africa’s increasing transition from the traditional banking system to a digital model, due to the pandemic-induced adoption of paperless transactions.

UMBA Inc, a US-based digital bank that operates a non-deposit credit company, in July acquired a majority stake in a Kenyan microfinance bank through its subsidiary UMBA Technology Ltd.

UMBA and other digital lenders are expected to increase financial inclusion in that market and expand access to credit for many small businesses.

UMBA acquired a 66.06% stake in Daraja Microfinance Bank Ltd effective July 1, following approval by the Central Bank of Kenya on May 23.

It is the second fintech firm to take a majority stake in a Kenyan microfinance outfit, after Branch International Ltd acquired Century Microfinance Bank.

Branch International Holding Ltd is owned by Branch International Inc, a company registered in Delaware, USA.

By acquiring a controlling stake in the microlenders, the digital lenders will overcome tough new rules that attempt to rein in digital lenders that appear to push borrowers into serious debt.

Many unemployed debtors and insolvent borrowers in Kenya have had to sell land, cars and objects of sentimental value in recent years to pay off debts.

December saw President Uhuru Kenyatta stem the growing micro-debt crisis by signing into law the Central Bank Amendment Bill 2021, which brought digital lenders under the central bank’s control.

The bill gives the regulator the power to license digital lenders in the country, as well as ensure the existence of fair and non-discriminatory practices in the credit market.

“This is to give the central bank the authority to regulate the digital lenders. This is something that has been long overdue, that we have come all this way and we look forward to being allowed and to ourselves to fix this lacuna that has been here for a while, central bank governor Patrick Njoroge told the media in November in last year.

Under the new regime, lenders will, from September, have to apply for approval of interest rates on their loans, disclose all credit terms to borrowers and have also been banned from sharing information about non-performing loans with third parties.

The Central Bank has published the regulations for digital credit providers 2022, which will require all digital lenders to apply for licenses from the Norwegian Banking Authority before September.

The central bank is expected to streamline the operation of the industry and curb Kenyans against predatory lenders.

A statement from the central bank said the investment by UMBA will strengthen Daraja MFB’s business model, adding that it will particularly support the digitization of Daraja MFB as it moves to offer “anytime anywhere” services to its customers.

“This is in line with [the Central Bank of Kenya’s] vision of a microfinance banking sector that works for and with Kenya, it says.

Daraja, which was licensed in 2015 and whose main customers are SMEs, has a market share of less than 1% of the microfinance banking sector in Kenya.

Central bank data shows that users of mobile-based digital lenders in Kenya, which include the Silicon Valley-backed Tala, have increased to two million in 2019, from 200,000 in 2016.

Kenya is a leader in both mobile money and digital lending in Africa, with several countries starting to adopt the technology.

A 2019 survey on digital credit found that 13.6% of Kenyans had borrowed from a digital lender, citing convenience and ease of access.

For digital banking, most jurisdictions apply banking laws and regulations for banks within their jurisdiction, regardless of the technology they use.

As digital lenders grow in Africa, combined with mobile banking, most of the unbanked population is expected to be drawn into mainstream financial services.

According to Global Finance, 50% of the African population is unbanked, which equates to 350 million people. With Africa’s population increasing rapidly, it is set to double in the next 30 years, adding another one billion people.

Now IBS Intelligence expects digital lending to redefine the dynamics of the credit market in Africa.

“With a lower cost base and improved reach, financial institutions – including banks, MFIs, neobanks and telcos – can simply do more with less. Digital lending lowers the cost of providing services and streamlines onboarding,” it said in its analysis. — bird history bureau