r Gregory THYS gregory@microrate.com Btissam DERDARI btissam@microrate.com Micro Africa LTD (Kenyan Operations) Kenya Social Rating Low social return overall through the combination of weak social results and weak social commitment. Note: The social rating stars compare all MFIs, assuming that microfinance has a de facto positive impact on human development. Social Results Social Commitment Weak Weak Summary description Micro Africa Limited ( MAL ) is a holding company registered in Kenya with lending operations in Kenya, Uganda, Rwanda, Tanzania and Sudan. The present report focuses exclusively on Micro Kenya ( MK ), the Kenyan division of MAL. With headquarters based in Nairobi, MK primarily offers individual loans to around 1,400 salary workers and entrepreneurs amounting to $1.7 million. With an average individual loan of $1,221 and approximately 70% of the portfolio in consumer loans, MicroRate does not consider MK to be offering microcredit. In 2009, however, management reintroduced group lending to help the MFI reach the lower-end niche; the average group loan size is $237 which is comparable with other Kenyan MFIs. As of, group lending represented 7.6% of the Date of visit July 2009 portfolio July and 2009 reached around 500 clients. Previous Social Rating n.a. Date of Previous Social Rating n.a. Social Rating completed 1 st Rating Rationale Principal Performance Indicators Social Profile of Kenya* Dec-08 Poverty Index 50% Extreme Poverty Index n.a. Unemployment Rate 40% MK s Indicators Dec-08 Jun-09 Number of borrowers 1,845 1,937 % rural client 28% 37% % women borrowers 26% 27% Average New Loan (US$) n.a. 859 Avg. Loan/GNI per capita 135% n.a. Client Turnover n.a. 47% Cost per borrower ($) 102 156 Effective Interest rate n.a. 66.1% * Source: World Bank and UNDP Effective Interest rate (group loans) Compared to best practices in microfinance, both MK s social results and commitment are weak. MK has historically concentrated on consumer credit for salaried employees (still 63% of the portfolio) and quick emergency loans for small businesses. It is good to see that the institution recently introduced group loans targeting the lower-end of the market. Despite high effective lending rates, MK has incurred substantial losses for the last two years. The institution will find it difficult to become sustainable in a highly competitive market unless it can reduce its operating expenses substantially. MK shows moderate social responsibility in its relations with staff. In all other respects with the exception of the new group lending program policies and business practices are determined by commercial rather than by social concerns. Highlights Social Results - Low depth of service despite the development of new products - Does not serve the poorest urban microcredit niche - Unsustainable financial situation - Low institutional responsibility towards clients Social Commitment + Implementation of a new incentive system, although lacking a social component + Moderate client service + New experienced staff in place - Low social commitment
GENERAL SUMMARY INSTITUTIONAL MISSION Micro Kenya s mission is to transform the livelihoods of its clients who are in viable economic activities while creating a rewarding and stimulating working environment for its employees. MK s mission is clear and emphasizes both improvements in the livelihood of its target clientele, viable entrepreneurs and care for its staff. While salary loans have historically been the core business of the institution, its microfinance ambitions are growing. MK has begun positioning itself in a lower market niche through the introduction of group loans with smaller amounts. SOCIAL RESULTS Depth and Diversity of Services (Page 4) MK offers a reasonably diversified range of products although they are largely concentrated in salaried loans- to entrepreneurs in viable businesses. In 2009, the institution started diversifying its product offering by providing both small business loans and group loans. MK aims to serve the lower niche of the market and to improve its outreach. However, the average amount for new loans remains much higher than what MicroRate has observed in Africa. Efficiency, Cost to the Client and Sustainability (Page 5) MK s operations are not sustainable. The MFI s strategy to internally strengthen the organization after two consecutive periods of losses will require considerable investment and will strangle the institution s growth. MK s introduction of group lending, which is more expensive by nature, will certainly help increase the volumes but is unlikely to improve the MFI s efficiency in the mediumterm. Finally, the plan to increase interest rates will likely affect their competitiveness and will prevent the MFI from reaching the lower-end of the market. Institutional Responsibility (Page 5) MK does not demonstrate particularly good results in terms of responsibility towards its clients and staff. MicroRate notes there is a strong focus on service delivery but little effort placed on building strong relationship with clients. However, MicroRate notes an improvement since the reorganization of the MFI early 2009. SOCIAL COMMITMENT (Page 6) MK shows commitment to achieving its mission to active and viable entrepreneurs. The mission is well communicated within the organization and the target niche is well known by all staff members. MK s new focus on microfinance clients and diversifying its product offering could pose as a challenge to the organization. A better understanding of the new market niche could help MK to develop appropriate products that satisfy client needs. In this regard, the new monitoring process and the new staff in place could help develop a better client service focus; this could allowing the MFI to grow with its clients as they graduate from group lending to individual lending. Copyright 2009 MicroRate Inc. - 2
Context COUNTRY S SOCIAL PROFILE Dec-06 Dec-07 Dec-08 Annual Inflation 14.5% 12.0% 26.2% Exchange rate 69.4 62.68 77.71 GDP annual growth 6.10% n.a. n.a. GNI per capita (US$) n.a. 680 687 GNI per capita, 40% poorest population (US$) n.a. n.a. 271 Population (million of people) 36.6 37.5 38 Poverty Rate* 50.0% 50.0% 50.0% Extreme Poverty Rate n.a. n.a. n.a. Unemployment rate n.a. n.a. 40.0% Source: IMF, UNDP. * Measured as population below poverty line (CIA World Factbook) Kenya s economy has been traditionally centered on agriculture. While both industry and tourism have grown within the past decade, farming activities still account for the major part of the country's economy. After two years of relative political and social stability, Kenya was affected by a post-election crisis in December 2007. The new government coalition formed early 2008 is likely to remain intact but faces serious strains from in-fighting and competition. Kenya s main challenges include corruption, money laundering laws, rehabilitating infrastructure and the current food crisis. According to the 2008 Human Development Report, Kenya ranked 148 of 177 countries 1 and remains one of the poorest economies in Africa, below the Sub-Saharan Africa region average. Despite this, Kenya continues to be the primary communication and financial hub of East Africa. Official statistics stated that about 50% of the population lives on less than 1 dollar per day 2 ; life expectancy is about 54 years and 43% of Kenyan have no access to drinking water 3. Kenya s financial market is one of the most dynamic and competitive markets in the sub region. Nevertheless, according to Finaccess survey 4 the formal financial system in Kenya provides services to only 23% of the economically active population. The remaining 77% are either not served at all or underserved by the informal financial sector through SACCOs (Savings and Credit Cooperative Societies), Microfinance Institutions (MFIs), ROSCAs and family or friends. MK positions itself between commercial banks and microfinance institutions and targets the higher-end of the market primarily with salary loans and business loans. Recently, the MFI reintroduced a group lending product which will likely improve the MFI s outreach. As of the date of this visit, the MFI served less than 2,000 borrowers through a small network of 4 branches. 1 According to the UNDP, the Human Development Index (HDI) measures life expectancy, adult literacy and enrollment in different school levels, and PPP (Source: Human Development Reports, UNDP, 2007/8). 2 Source: World Bank 3 Source: Human Development Reports, UNDP, 2007/8 4 Source: Finaccess 2009 survey Copyright 2009 MicroRate Inc. - 3
Social Results This section evaluates the social results and the institution s capacity, efficiency and consistency in accomplishing its social mission. MK s mission is clear and emphasizes both improvements in the livelihood of its target clientele, viable entrepreneurs and care for its staff. While salary loans have historically been the core business of the institution, its microfinance ambitions are growing. MK has begun positioning itself in a lower market niche through the introduction of group loans with smaller amounts. Depth and Diversity of Services This section evaluates the depth, diversity and quality of services offered. MK offers a reasonably diversified range of products although they are largely concentrated in salaried loans- to entrepreneurs in viable businesses. In 2009, the institution started diversifying its product offering by providing both small business loans and group loans. MK aims to serve the lower niche of the market and to improve its outreach. However, the average amount for new loans remains much higher than what MicroRate has observed in Africa. MKL SOCIAL INDICATORS Dec-08 Jun-09 Clients 1,845 1,937 Female clients (%) 26% 27% Clients in rural areas (%) 28% 37% Loans with non-traditional guarantees n.a. n.a. Average loan per borrower ($) $842 $990 Average first loan amount for group loans ($) n.a. $244 Average first loan amount for small business loans ($) n.a. $859 Average loan ($)/GNI per capita of 40% poorest 135% n.a. Number of financial services 1 1 Number of non financial services (Social services) 0 0 Outreach is low for MK in comparison to other Kenyan outfits rated by MicroRate; the institution has a small client base and reached less than 2,000 clients at the end of. The MFI offers 3 types of products (salary, small business and group loans) through its 4 branches, established in four of the eight provinces in Kenya. The institution exclusively focuses on banked entrepreneurs with viable businesses which exclude the low end of the market. While MK has no specific focus on gender, MicroRate observes that more than a quarter of its clients are women (27% in ). While MK s product offering is reasonably diversified, it could be further improved to become more competitive. Since salary loans comprise 63% of its portfolio, the proportion of loans invested in income-generating activities remains low. The MFI s low depth of services is reflected in the high average loan size of its business loans. The group loans, however, are more in line with what MicroRate has observed elsewhere in Africa. Product () Average loan size ($) Average loan ($) adjusted for PPP Group loans $237 $545 Small business loans $3,323 $7,643 With the recent re-introduction of group loans, MK is attempting to increase volume and serve a lower market niche (See MK 0609 Performance Report). MicroRate, however, notes that the MFI does not intend to serve the poorest of the market by these loans. For example, MK requires all groups to have a bank account for disbursements and repayments with the MFI, which is likely to be a burden for poorer clients. Apart from credit operations, MK is not offering any additional financial services to its clients. There are no complementary social services offered except for one program to raise awareness on AIDS. This program has been initiated by one of MK s shareholders. MicroRate notes the MFI does not intend to provide other social services in the medium-term. Copyright 2009 MicroRate Inc. - 4
Efficiency, Cost to the Client and Sustainability This section evaluates social efficiency and the capacity of the institution to be sustainable. MK s operations are not sustainable. The MFI s strategy to internally strengthen the organization after two consecutive periods of losses will require considerable investment and will strangle the institution s growth. MK s introduction of group lending, which is more expensive by nature, will certainly help increase the volumes but is unlikely to improve the MFI s efficiency in the mediumterm. Finally, the plan to increase interest rates will likely affect their competitiveness and will prevent the MFI from reaching the lower-end of the market. Social Efficiency and Sustainability Dec-08 Jun-09 Cost per borrower ($) $102 $156 Operating expenses 14.3% 17.7% Effective interest rate for a $500 group loan n.a. 66.1% Effective interest rate for a $500 small business loan n.a. 127.6% Return on Equity (ROE) * -61.5% -100.5% Return on Assets (ROA) * -17.6% -17.8% Operating margin -19.6% -20.9% Portfolio at risk n.a. n.a. Write-offs 13.1% 5.8% * Adjusted Social efficiency levels have decreased over the first months of 2009, notably because of recent investments to help reorganize and strengthen the organization. Cost per borrower doubled and operating expenses increased of about 20% in 2009. The MFI plans to increase its group lending operations, which are more costly by nature. As a result, the cost per borrower is likely to increase. The effective interest rates charged to clients are high (66% for group loans and 127% for business loans). The successive losses reported by MK (See MK 0609 Performance Report) have greatly endangered the institution s sustainability. To mitigate this, management is considering increasing interest rates, which is likely to affect the institution s competitiveness. Overall, MK still must show it can achieve sustainability in the medium-term by addressing the diverse challenges of competition and portfolio quality. Institutional Responsibility This section evaluates the institution s commitment to and relationship with its personnel, members, the community and the environment. MK does not demonstrate particularly good results in terms of responsibility towards its clients and staff. MicroRate notes there is a strong focus on service delivery but little effort placed on building strong relationship with clients. However, MicroRate notes an improvement since the reorganization of the MFI early 2009. Institutional Responsibility Dec-08 Jun-09 Personnel Turnover 44% 15% The MFI provides complete health insurance to its full time employees (in addition to the national health insurance) YES YES Full time employees have a career path n.a. YES There exists a code of conduct and ethics NO NO There exist a formal collection of complaints and suggestions from employees NO NO There exist a formal collection of complaints and suggestions from borrowers NO NO The MFI discloses its effective interest rate, commissions and other charges for all its YES YES credits The client is explained its rights and the special conditions of the contracts YES YES Client Turnover n.a. 47% There exists an environment-friendly credit policy YES YES MK s staff turnover decreased to 15 % as of June 2009 which remains high. However, this can be partly attributed to the new staff recruited early 2009. In January 2009, the new CEO conducted extensive interviews with all staff, primarily to assess staff competency and motivation but also to receive feedback about working conditions. On a positive note, all staff members benefit from a complementary health insurance which can also be extended to family members 5. Through a partnership with a commercial bank, MK also negotiated advantageous loan conditions for all staff members with preferred interest rates. There is also a clear career path for staff members, which provides motivation and employee loyalty. For example, all new loan officers are confirmed in their position when they reach 100 active loans. MK recruitment policy focuses on hiring qualified people with a strong work experience and 5 The employee pays this cost. Copyright 2009 MicroRate Inc. - 5 -
experience at leading MFIs. Salaries are competitive with the market. The real challenge will be to continue to retain and motivate staff Management is also considering rewarding staff with company shares. No final decision has been made but this could increase staff motivation. Overall, these practices indicate that MK is trying to build a strong corporate atmosphere and a good working environment to help retain staff. In terms of social responsibility towards its clients, MK has a mix of good and bad practices. Client turnover was quite high (47% as of ). High turnover can be partly explained by the nature of MK s loans as consumption borrowers would not need to renew their loan once they have acquired their desired asset or good; on the other hand, small business borrowers take an MK s loan on top of another loan for emergency cases. MK could improve client loyalty by building stronger relationships based in confidence and trust. MFIs with best practices for client loyalty conduct post-disbursement visits and satisfactory studies, among others. Finally, MK is not involved in any kind of activity concerning community outreach or the environment. Social Commitment Social Commitment measures the social focus of the institution and the probability that it will deviate from its social mission in the future. The evaluation is made by analyzing a variety of internal processes. MK shows commitment to achieving its mission to active and viable entrepreneurs. The mission is well communicated within the organization and the target niche is well known by all staff members. MK s new focus on microfinance clients and diversifying its product offering could pose as a challenge to the organization. A better understanding of the new market niche could help MK to develop appropriate products that satisfy client needs. In this regard, the new monitoring process and the new staff in place could help develop a better client service focus; this could allowing the MFI to grow with its clients as they graduate from group lending to individual lending. Mission, Communication, and Leadership MK s mission is clear and emphasizes both on the improvement of the livelihood of its target clientele, and its staff welfare. It does however not yet reflect the ambition of MK to serve a lower market niche. The board of directors and top management demonstrate strong leadership and effectively communicate MK s mission. MK s mission does not claim any social orientation or poverty alleviation focus. Strategic Planning MK s strategic plan for 2009-2011 is well detailed. It does not, however, address any social aspects. Increasing the number of active clients is the first objective in the plan. MK plans to increase its portfolio by an ambitious 192% by 2010 through opening new branches and launching more attractive products. Monitoring MK uses a new information system (MIS) that allows management to improve its monitoring of operations. However, apart from gender, the institution does not track any specific social indicators. MK does not conduct client satisfaction studies to learn more about the clients needs or requests. In early 2009, the new CEO did introduce quarterly meeting with client group leaders to obtain their feedback. Clients have appreciated these meetings and the meetings are likely to be continued in the future. Such initiatives will help MK to improve client loyalty. The institution does not produce any social reports for the board of directors. However, MicroRate notes some of MK s shareholders (Norfund, among others) are likely to increase their focus on social responsibility in the future. Client Service MK provides quick delivery of its services. MK s loan processing takes 48 hours, which fits those that are looking for quick access to loans for emergency cases. MK does serve specific demands of the clients but still remains a second choice after commercial banks which are more attractive and less expensive. Although MK has never conducted client satisfaction surveys, the new client feedback Copyright 2009 MicroRate Inc. - 6 -
meetings instilled by new management allow the institution to have a better understanding of clients needs and provide suggestions to improve its product offering. This led to the introduction of several new special products. As an example, MK developed a new product ( water at home ) in partnership with a local supplier to help assist clients in acquiring water tanks and ensuring water storage. This frees up the client s time, allowing them to spend more time at work. Loans for school fees are another example of special products provided by MK. Client Protection Client over-indebtedness is a big challenge for MK as almost all clients have another loan with another institution (Bank, SACCO or MFI). Since MK is not regulated, it cannot access information from the credit bureau which makes it difficult to assess the risk of client over-indebtedness. No specific measures have been implemented to reduce the risk of overindebtedness. MicroRate notes that the portfolio quality component of the new incentive scheme may help mitigate this risk as loan officer are likely to be more prudent before approving a loan. As far as pricing transparency is concerned, interest rates are clearly mentioned on the loan application. Loan officers also explain all fees and commissions to clients but it is unlikely that clients fully realize how much they are paying. During MicroRate s field visit, interviews with clients revealed that the interest rate mechanism was not fully understood. MK sets pricing to ensure its sustainability; for example, the new policy to convert the interest rate to a flat rate 6 will allow MK to generate more revenue. The repayment collection process seems to be in line with microfinance best practices. Loans are initially collected by loan officers and delinquent cases are outsourced to an external firm (debt collector). emphasizes microfinance experience and skills rather than social skills. Training for new loan officers begins with two weeks of on the job training followed by a threeday, in-house training session; this training procedure is not in line with industry best practices 7. All new recruits do, however, have previous microfinance experience which does help compensate for the limited training provided. It is good to see training manuals are in place. Some social aspects are addressed during training concerning customer care and client services. It is also good to see the MFI plans for continued training sessions. Beyond this, the staff is not trained on the social mission. There is no code of ethics for employees. Incentive Scheme In early 2009, MK developed a new incentive scheme tool to reward and motivate its staff. The tool is well designed and evaluates both quantitative and qualitative criteria (See MK 0609 Performance Report). However, it does not take into consideration any social components. It is good to see staff know their quarterly bonus and the bonuses are easily calculable. However, because many new hires have just started, only one loan officer was eligible for a bonus at the end of visit. This is rather low as incentives should be attainable to ensure they remain a motivating factor to employees. Hiring and training Most managers and loan officers come from a microfinance background with some social sensitivity. MicroRate notes the recruitment 6 Policy in place since August 1, 2009 Copyright 2009 MicroRate Inc. - 7-7 Best practices show a minimum of 2 months training for loan officers.
Financial statements BALANCE SHEET (US$'000) Dec-06 Dec-07 Dec-08 Jun-09 ASSETS Cash and Banks 198 30 21 108 Temporary Investments 0 0 0 0 Net Loans 1,104 1,468 1,280 1,764 Gross Loans 1,150 1,543 1,554 1,918 Performing Loans 1,150 1,380 1,352 1,688 Portfolio at Risk - 162 201 229 Loan Loss Reserve 46 74 274 154 Interest Receivables - - - 28 Other Current Assets 61 50 62 61 Current Assets 1,364 1,549 1,363 1,961 Long Term Investments - - - - Property and Equipment 16 39 78 168 Other Long Term Assets - - - - Total Assets 1,380 1,588 1,441 2,128 LIABILITIES Demand Deposits - 3 6 6 Short Term Time Deposits 83 105 66 74 Short Term Funding Liabilities 4-55 189 Other Short Term Liabilities 43 40 86 136 Current Liabilities 129 148 213 404 Long Term Time Deposits - - - - Long Term Funding Liabilities 731 820 967 1,665 Quasi-Capital Accounts - - - - Other Long Term Liabilities 6 - - - Total Liabilities 867 967 1,180 2,070 EQUITY Capital 422 467 377 376 Earnings (Losses) Period 52 55 (171) (229) Retained Earnings 25 99 56 (88) Other Capital Accounts 14 - - - Total Equity 513 621 262 59 Total Liabilities & Equity 1,380 1,588 1,441 2,128 Copyright 2009 MicroRate Inc. - 8 -
INCOME STATEMENT (US$'000) Dec-06 Dec-07 Dec-08 Jun-09 Interest and Fee Income 559 573 490 479 Cash Interest and Fee Income 559 573 490 451 Accruals (Int.. Receivables) - - - 28 Interest and Fee Expense 205 148 154 177 Net Interest Income 354 426 336 302 Provision for Loan Loss 72 121 417 356 Net Interest Income After Provisions 282 305 (82) (55) Operating Expense 251 303 222 302 Personnel 98 163 95 137 Other Administrative Expense 152 140 126 165 Net Operating Income 32 2 (303) (357) Other Income 12 47 115 108 Investment Income - - - - Other Non-Extraordinary Income 12 47 115 108 Other Expenses - 3 0 - MFI's Inflation Adjustment (if any) - - - - Other Non-Extraordinary Expenses - 3 0 - Net Not-Operating Income 43 46 (188) (249) Extraordinary Items 9 9 18 20 Extraordinary Income 9 9 18 20 Extraordinary Expense - - - - Net Income Before Taxes 52 55 (171) (229) Taxes - - - - Net Income 52 55 (171) (229) Copyright 2009 MicroRate Inc. - 9 -
APPENDIX 1 - MicroRate Grading Scale for Social Rating Social Rating Social Results Social Commitment Measures the social return of an investment in an MFI through the evaluation of Social Results and Social Commitment. - The MFI is judged on its social results, the poverty focus of its target microfinance niche, the cost and efficiency of its services, its social responsibility, and fulfillment of its social mission. Excellent - Good - Adequate - Poor Measures the social focus of an institution and assesses the probability of an MFI deviating from its social mission in the future. Very High High Medium Low Copyright 2009 MicroRate Inc. - 10 -
MicroRate Latin America Mayor Armando Blondet 261 San Isidro, Lima, 27 Lima Perú Phone: (511) 628-7054 Fax: (511) 628-8729 MicroRate Headquarters 3300 North Fairfax Drive, Suite 202 Arlington, VA 22301 United States Phone: 703-243-5340 Fax: 703-243-7380 MicroRate Africa 1 Rue Angle Lalla Yacout et rue Al Arrar Casablanca-Morocco Phone/Fax: 212 5 22 49 10 94 info@microrate.com www.microrate.com Copyright MicroRate 2009 This document is subject to copyright and may not be reproduced in whole or in part without the written permission of MicroRate. The ratings and other opinions contained herein are, and must be construed solely as statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by MicroRate in any form or manner whatsoever. Copyright 2009 MicroRate Inc. - 11 -