Microfinance Institutions Must Revisit Their Incentives

Published on 12th May 2008

Faulu offices in Kenya
A news item recently caught my attention – “Faulu Kenya’s profits hit Sh103 million.” Faulu is one of the big three unregulated microfinance companies in Kenya. It precisely made a pre-tax profit of Sh103.7 million in the financial year ending December 31st 2007.  The profit, as with most microfinance business, was largely attributed to interest income that rose from Sh288.3 million in 2006 to Sh 408.2 million in 2007.

During the same period, active loans increased by 32% to 90,339. Faulu disbursed loans worth Ksh2.8 billion. Faulu Kenya should be applauded for sharing its performance with the larger public and opening itself to scrutiny. It is rare to get financial numbers from the microfinance industry. Faulu becomes the only non-deposit taking institution to share its results with the public this year.

Faulu joins Equity Bank in Kenya, Compartamos in Mexico and many other institutions across the globe in confirming that microfinance is a good business proposition. It is socially paying, profitable and works with the low income but active Kenyans to fight poverty through entrepreneurship, and make money.

Microfinance is about reaching the unbanked with financial services. Unfortunately these target lack credit history. To circumvent, Microfinance institutions innovatively embrace non traditional collaterals such as group guarantees and peer pressure.

Most microfinance business models are expensive, labour intensive and characterised by high transactions costs. Aiming for breadth and depth of outreach, the institutions price their loans a little more than the mainstream banks. They could be enjoying some economies of scale for operating in the market for sometime now. They could also have become efficient and effective in operations over time.

Although it is legitimate for the microfinance industry to make profit, it is equally legitimate to pass the gains and efficiencies to the customers too. Access of financial services to the active poor is important, but affordability is important too. With the level of profitability these institutions are rolling out, the question of how affordable their services are  may start cropping up sooner than later.

The chairman of Faulu was quoted saying the institution is willing to divest by selling part of the equity to a group of “like-minded people.” 'Like-minded' is a broad term, but Faulu has a golden advantage to tap on the “first mover advantage.” Faulu is innovative.. It was the first microfinance institution in Africa to seek long term funding from the capital market through the Ksh500 million bond issued on March 2005. It is this innovative adventure that Faulu should borrow in selling part of its equity.

It should be obvious to social investors and to Kenyans by now that microfinance is a profitable business model. To the investing public, microfinance can be deceiving. It provides micro-loans and serves micro-businesses, yet the returns are by no means micro to an investor. Microfinance offers macro returns. Compatarmos in Mexico and Equity in Kenya has confirmed this. Faulu is definitely taking the same fast lane, the more reason Kenyans are willing to be “like minded”.

Mr Chairman - your staff, clients and Kenyans at large are “like minded.” They would be willing to take part ownership of Faulu. If the cake is small enough, share it with your staff and clients – they are the reason you are successful. If the cake is big enough, share it with the Kenyan people through the Nairobi Stock Exchange. Faulu in any case has been built through the sweat of Kenyans.

Charles G. Njoroge
BDS consultant and Microfinance Trainer
cgnjoro@gmail.com


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