KBA CEO CHAT - Value Creation through Unconventional Lending

CEO | Titus Karanja, K-Rep Bank, Chief Executive Officer
MONTH | November 2015
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Good morning everyone. We are glad to welcome you to this morning’s "My Chat with a Bank CEO" session.
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Hi Lorna, thank you joining the chat early this morning
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Our topic this morning is on Value Creation through Unconventional Lending and our host for the chat is Mr. Titus Karanja, the CEO of K-Rep Bank
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Morning Geoffrey, welcome to the chat
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Hello Fredrick, karibu to this morning's chat session
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As we await the official start of the chat, you may take this opportunity to update your profiles and add in a picture of yourself. We would like to know more about you.
nuru mugambi
Hi all good morning
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Hi Nuru, welcome to the chat
Alice Wairimu
Good Morning all
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Morning Alice. Glad you could join us
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As we await the official start of the chat, you're welcome to start posting your comments and questions so we can hit the ground running at 10am
Shafana Rajani
Good morning. Kindly advise your opinion on the future of the real estate industry from a complimentary service provider to this industry.
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Shafana, Irene, welcome to the chat. Glad you could join us.
nuru mugambi
morning alice ...
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The topic today is on Value Creation through Unconventional Lending. Keep the comments and questions coming.
ESTHER WANGUI
good morning all, its a pleasure to join the chat
Habil Olaka
Good morning all, I am counting the early birds...
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Good morning Esther, karibu sana
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Hello Habil, glad you could join us this morning
Carolyne Masaki
Good morning all
Carolyne Masaki
Ready for my chat with the CEO
nuru mugambi
Hi habil
KELVIN KALE
Good morning all
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Hello Kelvin, Carolyne and Samuel. Happy to have you on this morning's chat session
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Thanks Carolyne. We look forward to your participation
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Ladies and gentlemen help me welcome Mr. Titus Karanja, the CEO of K-Rep bank to take us through this topic
Morris Mwangi
good morning all
Maimuna Hassan
Good morning Sir, Kenya’s economy is predominantly SME based and access to capital /borrowing is a challenge. What role can formal banking institutions play in partnering with unconventional lenders e.g. the government and venture capitalist to widen credit reach? How proactive are Kenyan Banks in taking the risk to engage in unconventional banking and what are the possible risks? How can these be mitigated? Banks lending terms e.g. tangible securities as conditions for lending are known to scare away the would be borrowers, with the advent of credit scoring in Kenya how are bank’s willing to use this tool to carry out unsecured lending which is considered unconventional form of lending.
Titus Karanja
Good morning everyone and welcome to this chat. im looking forward to a lively discussion on this topic which is unconventional lending and any other area that may be of interest to you. welcome and thanks
Titus Karanja
good moring maimuna. you make very good points about the issues facing SMEs who you rightly observe are the backbone of kenyas economy.
Kasmil Masheti
Based on the target topics of this chat, does this discussion include the health sector? If so how can I be assisted at K-Rep?
Titus Karanja
Banks can partner with various institutions such as government, private equity investors, venture capitalists and even crowd sourced funding platforms to enhance access to credit for SMEs who may be collateral constrained.
Titus Karanja
The key to creating value is in crafting partnerships in order to deliver innovative products that respond to the customers' needs. This is because non bank institutions bring a different perspective to the lending risk equation. This can help banks to take on "riskier" businesses such as startups without exposing depositors funds to excessive risk.
KELVIN KALE
Under Asset and Liability Management is there is a happy medium between banks overextending themselves (lending too much) and lending enough to make a profit?
Titus Karanja
To Maimuna's question on how proactive kenyan banks are in unconventional banking i would say that the picture is mixed...while we have made considerable progress in lending against pure cash flows, we are making slow progress in the area of character based lending.
Francis Nasyomba
Titus, how is the banking sector taking up competition from MNO's in terms of short term lending?
Kenneth Nderitu
Good Morning All
nuru mugambi
Hi all
Brian Sila
How big can the risk apetite of banks get in relation to unsecured lending putting in mind its adverse effect on provisioning?
Chat Admin
Hi Nuru
Titus Karanja
To Shafana's point about the real estate sector...The real estate sector has now evolved to a point where there is a clear distinction between the experienced professional developers and what may be termed as "speculative" developers. This has created the opportunity for banks to develop innovative lending structures targeting developers with a track record.
Titus Karanja
The innovative lending structures include loans where the banks security and repayment is based on pre-sales and committed buyers for the same real estate project being financed.
Titus Karanja
Hi Kasmil...
Titus Karanja
The medical sector is a previously under served sector. Various banks have now developed product specifically targeting health sector entrepreneurs. The facilities include asset finance for specialised medical equipment and import facilities for medical supplies. For example, K-Rep bank has a special program in conjunction with various partners within the health sector.
ABIUD MOROGO
Hi Titus.With the recent increase in interest rate which really affects the micro sector, how do you perceive the effect on the level of NPLs in the market once it is felt first quarter of next year
Kimathi Benard
Morning Titus, K-rep bank has traditionally been known to be a micro lender, which is a form of unconventional lending. With Centum's acquisition of a controlling stake in the bank, how do we expect this to shape up, do we expect a more conventional relied lending approach going forward?
Titus Karanja
Morning Kelvin, there is indeed a balancing act in how banks manage their lending activity against available resources. This is an area that is subject to both regulatory limits and the banks' internal limits. As a rule of thumb the happy medium is at a point where the bank can maintain liquidity of above 20 to 25 percent.
Kasmil Masheti
Thank you very much for your answer Mr. Karanja. Could I kindly follow-up and ask what the interest rate for such a product or loan would be in the health sector, for example for an MRI (around KES 120million funding needed for such a machine) to an imaging centre?
Marion Agwaya
What are some of the unconventional ways of accessing credit for a business start-up? With no security to offer the bank
Daniel Rioba
Mr Titus Emerging markets like kenyan markets have been developing innovative products through even virtual platforms , One of the recent development in the industry is CreditSawa platform where a customer will advertise his credit needs and self appraisal will be done and then banks will advance the interest plus their terms and the borrower will choose the Lender which has favorable terms. Do you think this will revolutionize lending and to what extent ?
Titus Karanja
Hi Abiud, the recent increase in interest rates is indeed expected to have an impact on the repayment ability of customers not only in micro lending but also in the SME and corporate sectors. This is a concern for the banking industry, and banks have engaged customers on an individual basis to adjust the tenor of the facility and thus ease the burden on the customers.
Carolyne Masaki
Good morning Mr.Titus,
Titus Karanja
The current interest rate environment is actually an issue for banks as much as it is a concern to customers. The best advise is for customers to engage their bankers to negotiate on terms.
Carolyne Masaki
What strategies should banks focus on to tap the Youth Market,considering it makes the largest percentage in the population but have no collateral to get credit?Also considering the risks involved.
Titus Karanja
Welcome Kimathi. K-Rep has been a big name in microfinance for a long time. The investment by Centum will help us expand the business model while still retaining our heritage in microfinance. We intend to bring our experience in unconventional lending to bear on products offered to the SME sector, which after all largely graduates from micro enterprise. So effectively we want to grow with our customers.
Titus Karanja
Marion, welcome to the Chat. The time tested way for a business startup to access credit without security is to approach an institution that offers group based lending. In this model, group members co-guarantee each other to access credit. However, it is advisable for the entrepreneur to build up share capital before loading the business with debt.
Titus Karanja
Having said that, I acknowledge that accessing financial resources can seem like a daunting task for an entrepreneur who is just starting out. As banks we are working towards having better understanding of the challenges facing our customers who want to start up businesses.
Eric Njiru
Morning Titus,if all banks adopt the system of unconventional lending with the comfort of credit scoring,what parameters in your opinion can the bank put in place as a regulatory measure.
Titus Karanja
Karibu Kasmil, you can contact us at info@k-repbank.com or call 0711058001 for details the products that we offer.
FREDRICK ILUZU
What does K-Rep do to compete with the mushrooming of mobile phone lending e.g Mshwari,KCB MPESA and SAIDA..,....does it not affect your business lending to small entrepreneurs?
FREDRICK ILUZU
What does K-Rep do to compete with the mushrooming of mobile phone lending e.g Mshwari,KCB MPESA and SAIDA..,....does it not affect your business lending to small entrepreneurs?
FREDRICK ILUZU
What does K-Rep do to compete with the mushrooming of mobile phone lending e.g Mshwari,KCB MPESA and SAIDA..,....does it not affect your business lending to small entrepreneurs?
FREDRICK ILUZU
What does K-Rep do to compete with the mushrooming of mobile phone lending e.g Mshwari,KCB MPESA and SAIDA..,....does it not affect your business lending to small entrepreneurs?
Titus Karanja
Thanks Daniel. CreditSawa is indeed an example of the innovative initiatives towards stimulating unconventional lending. Such platforms contribute to enhanced consumer knowledge which will serve to deepen financial services in Kenya.
Alice Wairimu
Morning Titus,Its evident that most banks avoid lending start up businesses.In this day and age when jobs are rare and fresh graduates are coming up with business ideas to be able to make a living,do you think its a good idea for banks to consider financing start ups ?
Julian Onyango
Hello, following previous questions, if I want to get a loan for a MRI machine, can the MRI machine be used as security alone?
Titus Karanja
Hi Carolyne, Kenyan youth are vibrant entrepreneurs, and the lack of a credit history and tangible assets need not be barriers to accessing capital. Some banks offer solutions including group based lending, LPO financing, and invoice discounting which can help youthful entrepreneurs with bankable businesses or businesses with viable opportunities to access capital.
Titus Karanja
So Carolyne, your bank should be comfortable or willing to lend money against evidence of a genuine contract or order from a reputable institution.
Joseph Mwaniki
A judge dismissed the liquidation of bank that was put under receivership this year citing that the CBK was liable for failure of continuous inspections and assessment of banks and ensuring they comply banking rules and requirement. Is instances when the CBK can be held liable for bank crisis or failure or even losses incurred by clients and be made to compensate them other than from the Depositors' Compensation Fund?
Esther waceke
Good morning, it is evident that the current financial crisis is damaging the real economy. do you think the central bank could help by expanding the money supply via its printing machine? if it could, how and when?
Titus Karanja
Hello Eric, your point about controls around unconventional lending is valid.
Titus Karanja
In the same way that banks must take precautions under conventional lending, risk management measures must also be applied in unconventional lending. In this regard, unconventional lending is not necessarily riskier than traditional lending. It only presents a different set of risks; the key parameter required to manage risk in unconventional lending is knowledge and monitoring of customer behavior.
RICHARD RABACHI
Dear Titus I love you input and value on this topical issue. In your view where do you see the gramin lending methodology in the next one your bearing in mind K-rep was the first bank to apply the same in the Kenyan Banking industry?Is this model still valid?
Haggai Kessio
Morning Titus. Most banks have not appreciated the usage of CRB ratings in determination of their Risk while making credit decisions. This has infact made the whole process not to be relied upon as other factors like acount operations and collateral take center stage while ignoring CRB rating to determine the borrowers character, how can this be enhanced?
benjamin muli
mroning ,
Titus Karanja
Hi Fredrick, the development of mobile lending has expanded the level of access to credit in Kenya. Since these platforms were launched, total loans have grown indicating that they created new opportunities rather than cannibalizing on the existing. Most banks, including K-Rep, have developed mobile platforms that offer lending.
Titus Karanja
Thanks Alice, I agree you raise a very pertinent point and I agree it is a good idea for banks to consider financing start ups. We have shared in this discussion some of the ways banks are doing this, including group based lending which has been successful for a long time and LPO financing which is a fast growing option.
Titus Karanja
Julian yes to all your questions...kindly call 0711058001 or email info@k-repbank.com.
Daniel Rioba
Mr Titus , With volatility of exchange rates and interest rates ,high cost of living ,Unconventional lending is facing turbulent times and your guess is good as mine that NPLs in this sector will grow to a large extent ,How can banks shield themselves from this without necessarily punishing the borrower ?
benjamin muli
titus, most banks in kenya a targeting micro business while leveragimng on technology i.e gitigal channels mobile banking,internet.we have seen other going to an extent of acquiring their own mobile network meaning that they dont require services of the supplier,now do we expect to see more bank acquiring such mobile networks and is it likely to reap benefit really?
Titus Karanja
Esther, the central bank has a dual responsibility of ensuring stability as well as guaranteeing macroeconomic stability, therefore any actions must be towards enhancing both aspects.
Chat Admin
We are about to wrap up this morning's chat session..
Titus Karanja
Thanks Richard for your observation, the Grameen model is still very much valid and continues to lift large numbers at the bottom of the pyramid. However, the model needs to continue being updated for the age of electronic delivery of financial services.
Chat Admin
Mr. Titus Karanja will be taking some final questions and then we wrap up in about 10 minutes
Titus Karanja
Haggai you are right that credit profile based lending has been slow, however, the pace of uptake is dependent on the level of awareness of both banks and borrowers. As the market continues to understand how they can leverage credit profiles, are seeing increased uptake.
NICHOLUS MURIMI
Funding a project or business as an Average Citizen has never been easy; thus financial institutions are employing crowd funding as a gate way to financial muscle of their clients. what are the immediate rewards for these institutions.
Esther waceke
Mr. Titus, do banks earn alot with the priviledge of lending by creating money, whereby they seem to possess an unlimited lending capacity?
Joseph Mwaniki
It's from this unconventional lending that resulted to too much sub prime loans that led to 2008 financial crisis that caused dissolution of some financial institutions and companies. Some new measures and banking requirements were implemented to avoid the repeat of financial crisis. I am afraid that currently in Kenya with the closure of the two small tier banks might result to further closure of many other small banks due to too much transfer or movements from small banks to bigger banks (too big to fail banks). A bank while reporting its financial results claimed that their customer number and deposit was as result of such transfers. Do you think we might end adapting the Finance Minister's proposal to increase minimum capital requirement to encourage small banks to merge or accept take over bids so as to be able compete with other big banks? Or is the CBK supposed to come up with guidelines to protect small banks from this competition from big banks so as to protect depositors in small banks?
Titus Karanja
Thanks Nicholus, crowd funding helps institutions to access new opportunities while spreading the credit risk across a large number of people or investors. Financial institutions are therefore looking at ways on how to leverage this platform.
Chat Admin
Thank you all for your comments, i can see we are running out of time.
Titus Karanja
Thank you all for participating in the very lively CEO Chat. I appreciate insights and questions raised on this very important topic.
Titus Karanja
As I sign off, I would like to say that the development of unconventional lending is of critical importance to all of us.
Titus Karanja
Being bankers, entrepreneurs, and policy makers, we all need to work together towards developing more options and delivery channels for unconventional lending.
Titus Karanja
Thanks once again and have an enjoyable weekend.
Chat Admin
Ladies and Gentlemen, allow me to take this opportunity to thank Mr. Titus Karanja for being with us today and for his insights.
Chat Admin
Sorry we couldn't answer all the questions as we ran out of time but we certainly look forward to another chat session where we can share insights further on this topic
nuru mugambi
Interesting session
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We would like to thank you all so much for your participation and truly made the chat informative and a great success
RICHARD RABACHI
A very informative session
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Remember you can find transcripts and podcasts of past chat session on the chat archive section on this site
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Thank you all for your participation. Kindly note that the chat room closes in about 10 minutes