Key News Hook: Kenya’s Microfinance Sector Plunges Deeper into Crisis as Losses More Than Double in 2023
Kenya’s microfinance banking sector has reported a staggering loss of KSh2.4 billion before tax for the year ending December 31, 2023, according to the Central Bank of Kenya (CBK). This alarming figure represents a more than twofold increase from the KSh980 million loss recorded in the previous year, signaling a deepening crisis in a sector that plays a crucial role in providing financial services to underserved communities.
The severity of the situation is underscored by the fact that half of the country’s microfinance banks (MFBs) are now operating in the red. Out of the 14 institutions in the sector, seven reported losses, with Kenya Women Microfinance Bank Limited, Faulu Microfinance Bank Limited, and Rafiki Microfinance Bank Limited emerging as the main contributors to the sector’s dire financial state.
This dramatic downturn can be attributed to a perfect storm of factors that have battered the microfinance sector. On one hand, expenses surged by 6 percent, rising from KSh13.1 billion in 2022 to KSh13.9 billion in 2023. Simultaneously, the sector witnessed a 3 percent decline in revenue, dropping from KSh13.2 million in 2022 to KSh12.8 million in 2023.
Perhaps most alarming is the astronomical 957 percent increase in impairment losses on loans, skyrocketing from KSh114 million in 2022 to KSh1.2 billion in 2023. This surge, coupled with an 18 percent rise in staff costs, paints a picture of a sector grappling with mounting loan write-offs and escalating operational expenses.
The repercussions of this financial turmoil extend beyond the balance sheets of individual institutions. The sector’s return on equity has plummeted to a negative 35 percent, while the return on assets has fallen to negative 4 percent. These figures not only reflect the current crisis but also raise serious questions about the long-term viability and attractiveness of the microfinance sector to investors and stakeholders.
The deteriorating financial health of Kenya’s microfinance sector is further evidenced by the decline in core and total capital ratios. These crucial indicators of financial stability have dropped by 3 and 4 percent respectively, barely meeting the minimum regulatory requirements. Even more concerning is that three institutions have fallen below these thresholds, highlighting the precarious position of several players in the market.
Competition from commercial banks and digital lenders has exacerbated the sector’s woes. The microfinance banks experienced a 4.7 percent reduction in advances in 2023, leading to a significant decline in fee income. This shift in the competitive landscape underscores the challenges faced by traditional microfinance institutions in an increasingly digital and tech-driven financial services environment.
The sector’s struggles are not limited to its financial performance. The agency network, a crucial channel for reaching customers in remote areas, saw a dramatic contraction from 921 agents in 2022 to just 677 in 2023. This reduction in physical presence could potentially limit the sector’s ability to serve its target market effectively, particularly in rural and underbanked areas.
The sector’s branch network expanded slightly, with a net increase of two branches bringing the total to 115. Additionally, the overall liquidity ratio stood at a robust 63 percent, well above the statutory minimum of 20 percent, although one institution failed to meet this requirement.
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