KEEF Situation

MYC4 has highlighted severally, the challenges that have arisen as a result of issues within the provider KEEF. MYC4 would like to assure our stakeholders that we understand your concerns and frustrations because loans have defaulted, repayments are late and that the reassurances given by MYC4 coming from KEEF have not borne fruit. We apologize for this unfortunate situation. The situation is as a result of internal fraud amongst KEEF’s loan officers and in part KEEF’s decision to stop all operations pending investigations as opposed to a professional audit by a forensic team. MYC4 takes this opportunity to shed some more light on what is/has been happening between MYC4 and the provider KEEF. MYC4 has been working to recover payments from KEEF and the progress has been slower than we anticipated leading to defaults. In a meeting held on 10th September, MYC4 and KEEF agreed that KEEF will start repayments towards MYC4 in arrears and MYC4 would then allow KEEF to fund-raise on MYC4’s platform.

Daniel Kimani (KEEF GM) (Left) Titus Kuria (MYC4 GM) (Right)

The loan repayments would create room for further disbursements and vice versa. This did not occur and in a subsequent meeting held on 26th November, KEEF confirmed that the funds would be transferred by 3rd December. Based on this agreement, MYC4 informed the investors on the expected repayments and KEEF’s anticipated return to the platform. MYC4 was assured that KEEF would keep their end of the bargain. That this did not culminate is regrettable. MYC4’s CEO Mads Kjaer has been in Kenya for the week and together with MYC4’s EAFR General Manager Titus Kuria have been personally following up on this matter. KEEF’s cooperation is not very forthcoming. It has been difficult for Mads and Titus to meet with KEEF’s management team as MYC4 received communication from KEEF’s legal counsel that all future correspondents and/or engagements including visitation to their offices must be arranged through KEEF’s legal counsel. MYC4 has urged KEEF to accept their obligations and responsibilities according to the binding documents agreed upon during the partnership; the Provider & Loan Administrator Contract; the key provision is that KEEF gave a 100% credit risk guarantee and the Deed of Guarantee and Indemnity; key provision is that KEEF set aside funds, that are 15% of the OLB. As at this moment, KEEF is in breach of the Deed of Guarantee and Indemnity as they should ideally have transferred funds amounting to 15% of the defaulted portfolio by the this week. MYC4 expects KEEF to deal with this matter amicably and professionally and should this not happen, as per the contract MYC4 reserves the right to request for the handover of all loan applicants files including loan securities and collateral of any kind and the full repayment of the portfolio and interest outstanding etc., conduct investigations and take legal and criminal action against KEEF as an organization, its executive management and Board of Trustees. KEEF’s legal counsel has informed us that their offices are closed until 5th January. With the festive season and as the year comes to an end, we shall be unable to accomplish much in the next two weeks. However, MYC4 is using this time to prepare and inform stakeholders connected to MYC4 and KEEF such as Standard Chartered Bank, the Association of Micro Finance Institutions of Kenya (AMFI) and other relevant partners. There shall be more updates as the situation unfolds.

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A third round of Senegal recoveries now in investor accounts

We have received another batch of recoveries from the portfolio in Senegal which defaulted in 2008-2009. Earlier this year, 1,800 euro were recovered from the loan provider Birima, and last year investors received 14,375 euro.

Today another 6,175 euro have been returned to investor accounts as recoveries on Birima’s 23 defaulted loans.

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Risk Sharing Agreements and the Star Risk Rating

Risk sharing is among the measures that were introduced by MYC4 to mitigate risk as the learning curve fast progressed. The risk share agreements are limited to default risk only. The providers commit to pay all amounts due at the time of default including accrued interest and penalties. A default situation on MYC4 is deemed to occur after 180 days of non-payment by the borrowers. The Central Bank of Kenya classifies a loan that is late for more than 180 days as doubtful, and those more than 360 days as loss or due for write-off. The defaulted loans do not accrue any interest after they default; however any accrued interest at point of default must be paid.

MYC4 Africa Director, Eric Naivasha, and a provider signing risk share contract

To ensure that providers consistently have funds to pay the loans as they default, MYC4 requires that they set aside some funds, equivalent of 20% of the loan balance. The percentage of funds set aside is ideally meant to be equivalent to the default risk of an institution. The industry standard for default risk is about 2%; thus MYC4 takes a prudent approach to this by requiring a wider safety net. Providers have several options for providing for the 20% including bank accounts controlled jointly with MYC4, bank guarantees, escrow accounts in favor of MYC4, government paper and other financial instruments that MYC4 can legally place a lien on.

The risk share fund was introduced to align practices on MYC4 with best practice in finance. The belying factor is that when microfinance institutions (MFIs) borrow funds from any lender, they are required to pay back 100% of the loan plus interest at determined periodic intervals, regardless of whether the borrowers pay or not (on MYC4 they are only required to remit repayments that they receive from borrowers). On this understanding MYC4 now requires that the MFIs provide 100% risk share (Definitely now it is time to change the name from risk share to risk guarantee: However, this is debatable as the MFIs only guarantee default risk while the investors bear all currency risk).

Example of Star Rating as it appears on the MYC4 platform

The risk share agreement feeds into the risk score of the providers, commonly referred to as the star rating on MYC4. The star rating is a range of 0 to 5 with 5 stars being the best performance. The percentage covered per loan (currently set as 100% for all providers) and the percentage of outstanding portfolio covered by risk share fund (currently set as 20% for most providers) are two of three factors under the “will” category of the risk rating. The other factor under will category is the ratio of repayment fees over closing fees: partners that earn the higher percentage of their fees from collections/ repayments are deemed to have more will to manage risk than those that earn more from closing/ processing fee.

The other category in the star rating is referred to as “skill” and it captures performance related parameters. This category contains some parameters that are updated on a daily basis by the system automatically. These include PAR31+, Change in PAR31+ in last 6 months, worst PAR31+ in last 12 months, default rate and sum of repayments over total disbursed. Other parameters in the category skill are updated periodically as reviews are conducted. These include spot check score (every 6 months), annual review/ due diligence, and external rating for the last 12 months.

To read more about Risk Sharing follow this link. To read more about MYC4’s most recent spot checks, click here.

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New recoveries on loans from Senegal

In May last year, we received a bulk repayment of 14,375 euro from our suspended provider in Senegal, BIRIMA. Today, investors have received another 1,800 euro as recoveries on four of the defaulted loans, namely Prince Arts, Aïssatou Bouna Gueye, Marie Diallo, and Jalada Store.

We will stay in dialogue with BIRIMA to get them to honour the guarantee which was made to MYC4 and investors in September 2009 that no loans would default on the platform.

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