Many lenders are now betting big on the micro, small and medium-sized enterprises (MSMES) segment to drive growth and deepen financial inclusion in the wake of slowdown in large corporate loan disbursements.
An emerging credit quality stress among once good borrowers in segments such as retail and manufacturing is prompting commercial banks to turn their attention to credit-starved MSMEs that are widely seen as the next bet for growth.
Banks see this as an opportunity to diversify their risk further and capture new customers that can eventually grow into big entities and are, therefore, borrowing from global financiers to grow their MSME loan portfolios.
ICEA-Lion Asset Management head of research Judd Murigi reckons that shocks such as interest rate cap and Covid-19 have robbed banks an opportunity for robust lending and SMEs can provide a way out.
“There are a lot of hungry banks out there looking to take opportunities having been starved off high returns under disruptions emerging in the past five years including the rate cap regime and the Covid-19 pandemic,” said Mr Murigi in a recent press briefing.
He said many small entities have performed better than large corporates in meeting their loan repayments during the pandemic and this will raise their profile in the eyes of lenders.
“We think this provides a key learning opportunity for banks which have traditionally held a high risk perception for SMEs. This assessment needs readjusting,” said Mr Murigi.
Central Bank of Kenya (CBK) latest credit survey for up to last December showed that removal of rate caps in November 2019 has seen nearly half of banks raise their lending to SMEs.
“Forty two percent indicated that the repeal had increased their lending to SMEs since majority of the banks are on-boarding risk based pricing models which has increased financial institutions’ appetite to lend to SMEs,” said CBK in the survey.
The appetite for MSMEs has been fanned by the willingness of many lenders to help MSMEs to invest in financial management tools such as book keeping to reduce instances of abrupt business collapses.
The trainings have helped boost the quality of MSME loan book in recent years, with major lenders such as KCB, Equity and Cooperative Bank of Kenya raising their loan portfolios to these entities.
For instance, Co-operative Bank in August 2018 rolled out a $150 million (Sh16.5 billion) partnership programme with International Finance Corporation (IFC), to provide affordable financing and business training to Kenyan MSMEs.
Over 110,000 customers had taken up the MSME loans amounting to Sh14.8 billion at the end of September last year while another 8,950 entities had been trained on business management and planning.
Smaller firm are the lifeline of Kenya’s economy, accounting for over 70 percent of employment. Banks are supporting the growth of such entities and also winning employees of MSMEs for products such as digital loans.
To finance this segment, local banks are increasingly taking substantial loans from global funds such as the International Finance Corporation (IFC), European Investment Bank (EIB) and Agence Française de Développement (AFD).
Available data shows that banks such as Equity Bank, Co-operative Bank, KCB, Diamond Trust Bank, Bank of Africa, NCBA and I&M Bank are either on the IFC or EIB funding programme.
Last week, the EIB signed a Sh16.52 billion (€125 million) loan with Equity Group to help it increase working capital and trade-related lending to its SME clients, especially those facing Covid-19-related challenges.
This is the third tranche of financing for Equity Group after having signed a Sh5.48 billion ($50 million) facility with International Finance Corporation (IFC) in and a Sh10.96 billion ($100 million) facility from Proparco in September and October respectively. “These facilities strengthen Equity’s position to further enhance the strength of MSMEs who are key actors in value chains and ecosystems of the real economy in agriculture, trade, manufacturing, and health and MSME sectors,” said Equity group CEO James Mwangi.
Co-op Bank in January secured $75 million (Sh8.3 billion) loan from the IFC for onward lending to MSMEs crippled by the Covid-19 pandemic.
Chief executive at Co-op Gideon Muriuki said the loan will enhance the bank’s assets and liability match, offering the bank the flexibility of supporting small entities.
“The funding has come at a most opportune time as it boosts our ability to better support our MSME customers to stabilise and turn-around their businesses to meet the challenges brought about by the pandemic,” said Mr Muriuki.
KCB also last year received $150 million (Sh16.4 billion) from IFC for MSME lending. The credit line is part of IFC’s global $8 billion Covid-19 facility it announced in March last year.
Banks’s interest in MSMEs is also being lifted by the creation of a credit guarantee to effectively work as an insurance that gives lenders the confidence to extend loans to high-risk borrowers at flexible terms.
