Nairobi — Central Bank of Kenya has defended the proposed rules to regulate microfinance institutions which have been criticised as being too costly for the very firms it is meant to aid.

Microfinance institutions have until the end of June to comply with the new rules released by the Central Bank (CBK) on ownership and minimum capital, among other requirements, before they are licensed.

The rules provide information and guidance on the conditions that applicants have to fulfil to obtain a licence and accept deposits.

They require licensed institutions to maintain at all times a minimum core capital of at least Sh60 million.

Smaller microfinance institutions operating within a district or town will be required to retain capital of at least Sh20 million. CBK governor Njuguna Ndung'u acknowledged that the regulation and compliance comes with a cost, but added that such regulation was necessary for ensuring the safety and soundness of microfinance institutions.

"While it can be argued that these costs could result in more expensive financial products, the Central Bank, in developing these regulations, has specifically endeavoured to ensure that the cost to borrowers is significantly reduced through positive externalities by reducing risks," Prof Ndung'u said yesterday.

Some of the institutions say the rules may kill the business in rural areas, because the higher capital requirement makes them exclusive. They add that the requirement of a minimum capital was an attempt to create a second level of commercial banks.

Prof Ndung'u, however, told a workshop on the proposed rules held at the Kenya School Monetary Studies in Nairobi that the bank had given a number of concessions to ensure the institutions remained viable.

It expects microfinance firms to cut high fixed costs associated with running branches, especially in rural areas, by expanding through outreach.

Experience from other countries has shown that such agency arrangements lower operating costs for microfinance institutions, through sharing point of service interfaces with commercial retailers.