Jitegemee Trust Limited.“Institutional experience in wholesale lending for Microfinance operations” Presented at the AFRACA East Africa Sub- Regional Workshop 22-24th July 2008. By Newton Nthiga
Overview of the Discussion • Define wholesale lender (Apex) • Why apex institutions exist? • Overview of wholesale lending in Kenya • Background of Jitegemee Trust • Key successes for JTL • Challenges facing JTL in wholesale lending • Addressing these challenges • Action plans for JTL
Definition of wholesale lender (Apex) • A second-tier Institution that channels funding to multiple MFIs in a country or a region (C-Gap) • Funding may be provided with or without technical support. • They operate under various legal structures (Banks, NGOs, Companies, Co-operatives etc)
Why do Apex institutions exist? • To expand financial access particularly to smaller un-regulated MFIs( eg PKSF, JTL) • Stringent banking regulation limiting financial access to smaller or unregulated MFIs (lack of collateral) • Lack of appropriate products by commercial Banks to MFIs • Developmental aspects -Technical support to MFIs. • Source and support donor funding where MFIs are too small for direct funding (MESPT) • Directing resources to particular needy sectors (Youth &Women funds in kenya) • Oversight responsibilities un-regulated MFIs • As investment opportunities (Oiko Credit, Northern funds)
Wholesale lending in Kenya • Increasingly Competitive (for larger sustainable MFIs & Saccos) driven by strong interest by commercial banks in this segment. • Large un met Demand from smaller rural MFIs &Saccos • Pressure on interest rates (from commercial banks). • Diverse players including: • Non-banking financial institutions (4 major) • Direct Govt. lending through revolving funds • Several commercial & Development Banks • Traditional Cooperative Apex bodies(Kuscco, Nachu etc) • Foreign players(Hivos, Cordaid, etc)
Estimated statistics • Market size: 150 MFIs,(30 registered with AMFI) • About 5,000 Saccos( 230 with Front Office) Market served by 4 major Apex Inst. • Combined total Loan Fund (Oiko Credit, JTL, MESPT & Stromme- Kenya operations) USD.60 million. • Approximate total MFIs served - 85 ( Majority being Saccos) • Average loan size USD 300,000( for JTL). • Majority of Saccos are served by Co-operative Bank & Kuscco, while Commercial Banks & foreign players Serve MFIs • Huge Opportunities still exists for wholesale funding
Jitegemee Trust - Background • Inception: Registered as a Trust in 1997 & Incorporated as a Company limited by guarantee in 1998. • Funding: Initial fund provided by the Dutch Government. • Key Objective - Enhance financial services to low income individuals by strengthening institutions serving that market. • Governance: Run as a private sector entity by a local board (un-regulated)
(Cont…)Jitegemee Trust- Background • Mission: “To be a reliable wholesale provider of financial services to institutions that provide assistance relevant to low income individuals”. • Target market: • Legally registered lending institution (excludes CBOs SHG) • Proven delivery mechanism targeting low income individuals • Satisfy our set eligibility criteria( Min. operational period, No. of clients, governance etc.)
(cont…) Jitegemee Trust-Background • Size: USD 11 million • Product offering • On lending Loans- Differentiated types • Subordinated debt • Capacity support. • Key collateral: Floating Debenture over MFI Assets particularly the loan book( other forms considered on a case basis)
Key successes for JTL. • Market deepening-We have provided financing to rural MFis unable to access it from commercial banks • Institutional strengthening through capacity: • Quarterly partners forum • Exchange visits among partners • Diagnostic needs assessment through our capacity partners & funding. • Introduction of Best practices through financial reporting requirements. • Assisted in product development. • Lobbying and advocacy.
MFI financing - Challenges facing JTL • Competitive environment driven by commercial banks- Mainly large and more sustainable institutions • Un met demand for the smaller rural MFis with weak financing fundamentals • Un-regulated MFI sector- Emergence of unscrupulous operators . • Development of the MFI sector- Lack of critical mass of sustainable traditional MFIs thus our shift to Saccos that are regulated and more sustainable • Pressure on pricing- from deposit taking inst. • Limited product offering • Addressing capacity needs.
…… Challenges facing JTL • High risks for smaller institutions-Low operational levels & weak institutional structures. • Challenges in client selection- High rejection rate common in all apex inst. • High monitoring costs- Mainly smaller MFIs in rural areas. • Access to funding - for on lending & capacity due to our low lending rates. • Limitation in the legal structure for Non- Banking & un regulated Inst. In attracting social investors • Market Positioning- We lack infrastructural presence.
Addressing these challenges • Integrated financing Model-An inclusive financial needs assessment for MFIs • Establish quasi-debt/ Equity products-To support the smaller weaker institutions. • Enhance targeted capacity support • Promote and support development of commercial products (Saccos) • Review of the selection criteria and enhance monitoring (case of PKSF) • Establish financing conditions & incentives that promote adoption of Best practices.
……… addressing challenges • Lobbying and advocacy- To mainstream non banking apexes in the financial system. • Networking- For wholesale lenders to shares experiences • Advocating for regulation- Both MFIs & Apex institutions • Partnerships- Social investors, Capacity providers • Strengthen governance and institutional structures for Apex( Non banking & unregulated)
Action plans for Jitegemee Trust • Transform into an appropriate legal structure. • Building Partnerships with : • Capacity building institutions for technical support • Development organizations providing capacity grants • Adopt a strategy of identifying, supporting & developing smaller institutions into sustainability • Equity investment in transforming MFIs • Improving Margins through product diversification & joint investments to serve particular needs.