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Digital lenders train sights on struggling small banks – Business Daily

American digital bank UMBA recently acquired a majority stake in Daraja, a deposit-taking microfinance bank, in the latest purchase that has made the loss-making industry a target for acquisitions.
The Central Bank of Kenya (CBK) said the San Francisco-based firm would acquire 66.06 percent shareholding of Daraja Microfinance Bank Limited for an undisclosed amount.
This is the second digital bank to acquire a microfinancier that has recorded losses for the past six consecutive years amid increasing disruption by digital lenders.
Daraja licensed in 2015 and whose main customers are small and medium enterprises, had a market share of below one percent (0.2 percent), being among the small players in the industry.
The acquisition is expected to give UMBA a presence in Kenya’s competitive financial sector, and support the microfinance firm in offering digital loans that have grown in preference among individuals and SMEs due to penetration of mobile lenders.
Kenya Bankers Association (KBA) director for research and policy Samuel Tiriongo said the entry of digital banks could be driven by need to meet capital and licenses requirements.
“We are not privy to reasons of acquisitions but could be capital base and expansion of business by acquiring an entity with a good customer base,’’ Mr Tiriongo said.
“Other than starting from scratch, an institution could be driven by plug and play strategy especially when it can’t meet capital requirements.”
International Finance Corporation (IFC)-backed digital lender Branch, in March concluded the acquisition of 84.89 percent majority stake in Century microfinance bank as the mobile lender seeks to expand as a digital bank across key markets in Africa.
The consistent losses in the microfinance sector has seen the banking regulator direct players wishing to join the industry to buy out existing players instead of setting up a new firm. The entry also coincides with regulations that require mobile loan providers to have at least one registered physical office.
Branch had revealed that it had first sought a license to operate as microfinance two years ago before being turned towards existing players.
It had talked to other three microfinance banks before settling on Century, which met its requirements based on years of operations, capital adequacy ratios, strategy in the market and governance structures.
“We had looked at the idea of starting ourselves as microfinance from the ground up but from a regulator’s perspective, they suggested we look around from the ones that exist. It’s where we are starting from. We decided to look at the microfinance space because we also offer nano loans… It is a space we are also looking to play at because SMEs are looking for working capital loans, and maybe smaller amounts like half a million that we can do digitally,” said Rose Muturi, managing director, Branch East Africa in a past interview with Business Daily.
She did not disclose the other microfinance banks ‘because they were going through other transactions.’
Key Microfinance, another small-tier lender (0.4 percent market share) was last month acquired by LOLC Holdings Plc, Sri Lanka’s second-largest publicly traded company.
New buyers have set an expansion target for the Key, previously known as Remu Microfinance eyeing at least four outlets by the end of the year.
Remu was more of a regional lender with branches in Nairobi, Meru and Maua, but the new buyers are building a new fully-fledged micro lender with a wider focus.
“It is great for the ecosystem to have diverse players competing. We are all regulated by CBK,” added Kevin Mutiso, chairman of Digital Lenders Association of Kenya.
Kenya’s 14 microfinance banks reported a combined loss before tax of Sh877 million in 2021.
Even though the net loss had narrowed from Sh2.2 billion recorded in 2020, it was the sixth year for the industry in loss-making position.
“CBK welcomes this transaction that is a critical component of Daraja MFB’s transformation plan. It will strengthen Daraja MFB and support the stability of Kenya’s microfinance banking sector,” CBK stated.
Lending remains the top business activity undertaken by the microfinance industry, however, the banks are yet to make a comeback despite improved business activities and ability to price loans based on risk profile of the borrowers unlike commercial banks yet to adopt the pricing control.
The industry has seen stiff competition from mobile lenders amid increasing uptake of financial services through phones, a shift also pushing commercial banks to adopt digital solutions to widen their reach.
In 2021, only four micro-lenders reported profits, while the rest registered losses.
Lenders such as Faulu Microfinance Bank, Maisha and Rafiki Microfinance Bank Limited took the largest loss position of Sh522 million, Sh178 million and Sh153 million respectively. This is despite Faulu having the largest market share at 39.5 percent. Maisha held 4.3 while Rafiki had 7.2 percent market share.
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Joseph Muongi

Financial.co.ke was founded by Mr. Joseph Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance. He's also the lead financial consultant.