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Normalcy returns for shadow lenders as repayment rates begin to impress

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By Steve Umidha

Kenya’s non-banking financial companies, mortgage lenders and microfinance institutions (MFIs) are slowly limping back to normal operations after months of gloom.

Bankers and financial experts said that bulk of the demand for retail loans which is driving loan growth at most shadow lending institutions is for business expansion and education – school fees.

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

“It is surprising really at this surge especially considering how the first few months of the year had been for our business due to the pandemic. 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 the previous years which would range between 90 and 91 percent,” commented Phillip Kibet, the Chief executive of Micro Cap Holdings – a local lending firm.

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 with most of them scaling down operations.

Repayment rates or collection rates for most shadow lenders have jumped to over 95 percent between July and September which is surprisingly higher than 90 percent rates in pre-COVID era in a period that has also seen an uptick in disbursement rates in the micro lending space.

Kibet attributed the trend to a shift by Kenyan borrowers who are now shying away from fintechs or mobile lenders who scaled down their lending activities because of the disruptions from COVID-19 – and who lack flexible repayment plans or loan holidays.

The risk of infections and measures postulated by the government then 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.

“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 we lend to our 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 Mr. Macharia.

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 that is particularly challenging because 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, signaling 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.

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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