Banks open year with billions for lending to SMEs

Large lenders — including Equity, KCB and Cooperative Bank of Kenya — have borrowed billions of shillings to support small entities in the wake of Covid-19 disruptions.

Now, these banks are facing the test of their promise in the new year with Equity having continued with the trend thanks to a $165 million (Sh18.6 billion) loan for the Kenyan unit.

Part of the money will be used to lend to micro, small and medium-sized enterprises (MSMEs) and adds to the billions of shillings the lender has tapped as long-term loans since Covid-19 struck in early 2020.

Equity’s long-term borrowing for instance jumped by Sh46.59 billion between the onset of the pandemic in March 2020 and the end of September last year to hit Sh99.18 billion, with the lender pledging support to MSMEs.

KCB Group has also taken the same direction, tapping into long-term loans from lenders such as International Finance Corporation (IFC).

Where banks are getting money 

Local banks are increasingly taking loans from global funds, such as the IFC, European Investment Bank (EIB) and Agence Française de Développement (AFD).

KCB’s borrowed funds have grown from Sh21.96 billion at the end of March 2020 to Sh35.27 billion last September, with a target on MSMEs seeking recovery from Covid-19 disruptions. 

Group CEO Joshua Oigara said the lender has launched an ambitious project on SMEs and estimates that the bank will more than double SME lending by between Sh50 billion and Sh60 billion this year.

“We know the SMEs we are dealing with and we have the opportunity to increase the size of the portfolio,” said Oigara.

“It is about finding short-term lines of credit that enable them to meet cash flow needs and also increasing their credit limits.”

Oigara has also increased loan approval limits at branch levels to support SMEs. Where the lender had Sh1 million limits, Oigara says Sh3 million is now a possibility.

However, as banks make these steps to increase lending to small firms, a disconnect exists between the SMEs portfolio and the billions amassed for lending to such entities.

It is a problem that Oigara wants KCB to overcome this year and cut the time between application and approval from 14 days to seven days.

“The (Covid-19) crisis in 2020, in particular, created some delay. But there is more than just lending. We are doing training and capacity building to create a network of enterprises,” he said.

High risk no more

Banks are keen to warm up to SMEs playing in business sectors that have traditionally been “blacklisted” due to high risk.

This is done through putting requirements such as proper records and documentation that can help banks rely on historical trends to make risk forecasts.

Cooperative Bank, which in 2018, launched an MSME proposition has been enhancing the training of such entities across counties to equip them to succeed when they tap loans.

Over 139,000 MSMEs had been on boarded to Co-op’s three packages — gold, silver and bronze — which are bands designed based on the entities’ business turnover.

The lender discloses that it had by September last year trained 14,665 MSME customers, held 181 non-financial services clinics, thirteen networking forums and three international business trips to support micro firms.

“We also support our customers in the MSME segment through sourcing for funds from our long-term funding partners that would ease their financing,” the lender said.

The lender’s borrowed funds hit Sh43.8 billion last September, being 67.6 per cent increase from Sh26.2 billion in September 2020.

The amount came from lenders such as IFC (Sh8.25 billion) with Co-op closing September with an MSME loan book of Sh15.32 billion or five per cent of the total loan book.

CBK data shows there were 915,115 active MSME loan accounts in the banking industry as of December 2020, with a total value of Sh638.3 billion.

SME loans profitable for banks 

Lending to MSMEs generated Sh70.8 billion for the banking industry in 2020, representing 12.2 per cent of the total income generated from lending by the banking industry.

Stanbic Bank Kenya disclosed early December that it had supported at least 21,000 SMEs through its diverse programs and seeks to grow this in the current year.

Head of direct banking, business and commercial clients at Stanbic, Collins Wanyonyi, said the lender has rolled out digital lending to support SMEs access to loans much faster.

Digital lending, he says, is transaction-based and targets amounts up to Sh3 million payable in between 45 days to 18 months based on one’s account history.

“This automated review has reduced review period to one hour and loan drawdown to same-day, creating efficiency in the process while supporting customers based on their account conduct,” said Mr Wanyonyi.

The lender has also introduced the SME Resilience — a 10 module training that covers areas the bank views as critical to the success of an SME and aims at addressing default risk.

This will enhance access to unsecured lending of up to Sh3 million for working capital and Sh10 million on trade finance solutions, removing the collateral hurdle facing many SMEs.

Increasing focus by banks towards MSMEs comes on the back of a joint survey by the Kenya National Bureau of Statistics (KNBS), Central Bank of Kenya (CBK) and Financial Sector Deepening Trust (FSD) Kenya showing micro-entities are still struggling.

Big hole to fill 

The struggles highlight the big hole that banks will be required to fill in 2022 if the fortunes of MSMEs are to get better as the disruptions of the Covid-19 pandemic softens.

As at end of July last year, 38 per cent of micro-businesses said they had seen recovery, with average revenues at the same level or higher than pre-pandemic levels, according to the survey.

However, a majority (62 per cent) of MSMEs are still earning less than their pre-pandemic revenues.

The survey said business closures increased, with 35 per cent of business owners who had businesses in the pre-pandemic era no longer involved in any business activity by July 2021.

“Business closures increased in 2021, with 35 per cent of business owners who had businesses in pre-Covid-19 no longer involved in any business activity in July 2021,” said the survey.

Such an environment presents an opportunity for lenders to come in and support the small businesses on their recovery journey.

In July, only 32 per cent of MSMEs claimed to have savings, down from 60 per cent in February 2020 just before Covid-19 disruptions set in.

According to the survey, food insecurity remained high, with 47 per cent of MSME households missing meals in July 2021 compared to 14 per cent in February 2020.

But with MSMEs yearning for a better 2022, the focus will also be on banks on how they react to the State directive that froze negative listing of MSMEs defaulting on below Sh5 million up to the end of September.

The rollout of the directive will leave banks with no tools to differentiate between good borrowers and defaulters, according to CBK.

This situation, Central Bank has warned, may tempt banks to close the taps of credit in a move that is likely to hurt MSMEs seeking loans to recover from coronavirus-induced economic downturn.

Another headache could be delays in CBK approving loan pricing models meant to allow banks to price risk following the removal of rate caps in November 2019.

Banks’ credit pricing models require approval by the CBK, and banks have to justify charging higher rates to customers presenting higher credit risks, according to latest disclosures by International Monetary Fund.

Kenya Bankers Association CEO Habil Olaka said getting such approvals will help add momentum in banks’ quest to serve customers like small businesses.

“Banks have significantly anchored themselves to support such sectors of the economy. If all banks can have their models for risk-based pricing getting the necessary CBK approvals as soon as possible, then we will have them appropriately price risk and, therefore, lend to those specific segments and boost economic recovery,” said Olaka.