Microlenders are attracting capital, thanks to suffocating lending rules by commercial banks. Does this mean banks should be worried? KEABETSWE NEWEL engages to two top financial analysts.
It appears microlenders are defining the future of banking. Considered a saviour for the unbanked who cannot be serviced by banks, microlenders are attracting capital.
In the month of October 2014 alone the regulator, Non-bank Financial Institutions Regulatory Authority (NBFIRA) issued three licenses to micro lenders and in December, an additional five was issued. A financial analyst at Ipro Botswana sees this as testimony to the growth of the micro finance sector, which, according to Emmanuel Letsomane, will over shadow commercial banks.
He says banks have themselves to blame as they imposed suffocating lending requirements thereby attracting fewer applicants. “This reduction has seen consumer lending growth shifting from the banks to consumer finance players,” he explains. Commercial banks could not respond to Business Weekly and Review questions saying company operations cannot be discussed publicly when they are about to report their financial results.
Microlenders are not tapping into the banking market as the target borrowers are different.
However Kwabena Antwi Investment Analyst at Afena Capital Botswana offers a divergent view. Microlenders, she argues, are not tapping into the banking market as the target borrowers are different. “Banks tend to lend to higher quality borrowers who meet stringent requirements unlike micro-lenders,” argues Antwi. Interestingly a FinScope Consumer Survey released last year by Finscope says fewer customers are visiting banking halls to seek loans. In 2009, lenders from commercial banks declined from 25 percent to 16 percent today. For Letsomane this indicates that growth in microlenders is behind this renewed optimism.
The study further indicates that at least 3 percent consumers rely on informal mechanisms such as money-lenders, while about 2 percent use formal non-bank credit with prospects of growth going forward. “There is no doubt non-deposit funding is gaining access to small businesses and individuals. The danger is not that non-banks will replicate the universal banking model, however by innovating around it they fundamentally undermine the traditional integrated business model,” Letsomane argues.
He cautions however that micro lenders cannot support a balance sheet large enough to shake banks and directly take them on without scrutiny from regulators. Commercial banks consolidated balance sheet is at P68 billion. Letsomane says there is a clear cut line between micro lenders and banks. He says micro lenders play a major role in terms of financial inclusion and tend to focus on the financially excluded. The business benefits from less regulation in contrast to banks which are limited by regulatory provisions.
His Afena Capital counterpart Antwi says the quality of the loan book which banks own should increase as a result of conservative lending requirements. This should lead to lower impairments and write-offs and hence increased profitability going forward as long as loan book growth rates remain reasonable. On the other hand, micro-lenders are re-defining their products, and these are the players which Letsomane says have taken note of the financial inclusion gap and are tailoring products that act as a gateway to the financially excluded.
“Where the banks cannot go, this is where we go in because we tailor our products to offer solutions where the commercial banks cannot,” says Chris Low, Group Managing Director (MD) at Letshego, Botswana’s blue chip, microfinance firm. Letshego, with a loan-book of around P6 billion, is on a vigorous financial inclusion drive, that targets to accommodate all the unbanked population in Botswana, give financial access to those who are un able to acquire it at the commercial banks, be it businesses or individuals. Low, a former employee at Goldman Sachs Bank says Letshego’s biggest plan however is to acquire banking licenses across ten African market where it operates.
“This could be mirroring the conservative nature of the banks, especially towards the riskier unsecured lending which tends to be the case with households, exuberated by a tough operating environment; deteriorating deposits and shrinking margins on deposits,” Letsomane says. The micro-lending business is on the rise. Recently a new entrant, GetBucks has hit the market and now private sector employees can access short term to long term loans with the upcoming micro-finance company, according to its MD Marthin de Kock. “Our services will be further given to businesses which have a hard time accessing finance,” de Kok says.
Another growing business is the Pawn Shops which has accelerated by 22 percent between 2011 and 2013.
While micro-lenders makes access to credit easier for both businesses and individuals, others are tapping into the deposit taking and savings division, which could provide direct competition to the banks. Most interestingly, non-bank investment institutions are also on the rise, prompting people to alternatively keep their money in these investment firms rather than in banks.
Letsomane says, another growing business is the Pawn Shops which has accelerated by 22 percent between 2011 and 2013 and requires no licensing from the regulatory body. He says borrowers have found alternative fund sources to banks. Micro lenders’ loan books are more skewed towards the short term and the screening process is less rigorous which explains them being an alternative to most households especially those carrying high loads of debt.
Between 2009 and 2013 the number of Retirement Funds grew by 46 percent, Investment Institutions by 71 percent, Insurers/Reinsurers by 17 percent,” he says. Investment Management firms like Ipro Botswana, according to Managing Director Amit Bakhirta. He told The Business Weekly & Review previously that his firm is an answer to low yields and returns driven by low interest rates in commercial banks which give Batswana unattractive benefits on savings which are way lower than 5 percent.
Interestingly, Bakhirta mentions one investment product, the Ponelopele Fund, which he says would give individual and local investors 10-15 percent net returns per anaum, which is by far the best option as compared to 3-5 percent interest rates on savings in commercial banks. “These service providers often offer compelling alternatives to bank deposits hence negatively impacting some banking market players,” cautions Letsomane. He says it calls for banks to go to the drawing board and reinvent themselves with innovative solutions to the financial needs of retail and business customers and the use of customer data, insight, knowledge and relationships to cross-sell.