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Shadow banking boom is back, collections hit 95pc

By Steve Umidha
Wednesday, November 4th, 2020
Non-banking financial companies are slowly limping back to normal operations after months of gloom caused by the outbreak of coronavirus pandemic. Photo/PD/File
In summary

Steve Umidha @UmidhaSteve

Local non-banking financial companies, mortgage lenders and microfinance institutions (MFIs) are slowly limping back to normal operations after months of gloom caused by the outbreak of Coronavirus pandemic.

Financial experts said bulk of the demand driving loan growth at most of the shadow banking institutions is driven by business expansion and school fees.

Some lenders have also introduced multiple relaxation and repayment breaks to attract borrowers who have avoided fresh loans since the pandemic cast a shadow over jobs and incomes for most Kenyans.

Micro Cap Holdings chief executive Phillip Kibet said the resurgence is really surprising, considering how Covid-19 affected the businesses in first few months of the year.

“Our repayment rates for instance, have been growing impressively since the end of May at about 97 per cent compared to what we saw in previous years which would range between 90 and 91 per cent,” the boss of the local lending firm added.

Type of lending

Shadow banking refers to any type of lending provided by financial institutions that are not commercial banks and not regulated as banks.

Like traditional banks, shadow banks rely on short-term funds to make longer-term loans and rely on money from investors for making loans.

Owing to the onslaught that led to a nationwide lockdown in March, collection rates had fallen to a trickle as microfinance institutions (MFIs) collect money from borrowers mostly in cash.

Repayment rates or collection rates for most shadow lenders have jumped to over 95 per cent between July and September, according to Kibet.

The risk of infections and measures postulated by the government  made the collection process nearly impossible, according to financial expert and banker Macharia Kamau, who says the situation has tremendously improved since July when a host of restrictions were lifted.

He also confirmed that there has been an improved revision in the last four months since the lifting on travel restrictions with over 95 per cent of collection or repayment rates of amounts lent to customers. 

“This is better than what we had previously witnessed in the three months preceding July when the Central Bank made a plea to financial institutions on moratoriums,” said Kamau.

Microfinance — a popular mode of borrowing among borrowers also called microcredit, is a type of banking service that allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices.

And like conventional lenders, micro financiers charge interest on loans and institute specific repayment plans – which is sometimes prone to default.

This is particularly challenging as it pits the lender’s need for institutional survival against the difficult circumstances of the defaulting customer.

Indeed the business environment has been refining if the last three Stanbic Bank Kenya Purchasing Managers Index (PMI) Surveys are anything to go by.

Kenya’s private sector recorded a third straight month of growth in September, with output and new orders rising solidly amid second phased reopening of the economy in August.

The Stanbic Bank Kenya Purchasing Managers Index (PMI) Survey posted 56.3, signalling continued improvement in business conditions in September — the highest reading since April 2018 in the health of the private sector economy.

September data pointed to a third consecutive monthly increase in output across the Kenyan private sector economy — with the rate of expansion quickening from August, and was the fastest seen in almost two-and-a-half years.

Third Quarter

With the government easing lockdown restrictions during the third quarter of the year, the September PMI index shows that firms saw a release of pent-up demand as clients largely returned to markets.

“Rising demand led to a solid uptick in backlogs of work during September, which led some firms to hire new workers.

This counteracted job cuts at other firms, amid efforts to reduce expenses,” reads a statement by PMI released last month.

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