Is Microfinance Opening Itself Up to Scrutiny? [opinion]

A news item in the print media drew my attention last week - "Faulu Kenya's profits hit Sh103 million". Faulu is a microfinance institution and one of the big three unregulated microfinance companies in Kenya. It made a pre-tax profit of Sh103.7 million in the financial year ending December 31, 2007.

Faulu joins Equity Bank in Kenya and Compartamos in Mexico and many other institutions across the globe in confirming that microfinance is a good business proposition. It is socially paying and profitable.

Working with the low income but active Kenyans in both urban and rural areas, partnering with them as they fight their poverty through entrepreneurship, and making money with them and from them creates value for microfinance lenders.

Microfinance is about reaching the unbanked with financial services. Unfortunately, these target clients for microfinance lack credit history making lending to this group risky. To circumvent all these financial access hurdles to the active poor, Microfinance institutions innovatively embrace non traditional collateral such as group guarantees and peer pressure.

Further, microfinance business model is expensive and labour intensive. But these institutions need to get a return commensurate to the hassles and risks involved in lending small loans to the active poor, mostly with no credit history of their own. Unfortunately, the profits these microfinance institution and banks serving small and microbusinesses are making is confounding.

It is possible 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.

However, it is good and legitimate for the microfinance industry to make profits, but its equally legitimate to pass the gains and efficiencies to the customers . 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.

Further the chairman of Faulu was quoted as 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 an innovative institution. It was the first microfinance institution in Africa to seek long term funding from the capital market. It is this innovative adventure that Faulu should borrow in selling part of its equity.

Njoroge is a BDS consultant and microfinance trainer.