The business of a bank is to take deposits and offer interest to its saving clients, give out loans, then charge a higher interest on borrowers, taking home the difference as profit.
So, when a bank accepts deposits but is not lending as much, it accumulates costs and does not make enough money from loans.
Kenyan banks are in this conundrum, having sworn not to lend to small businesses because they are too risky. But these banks are now grappling with the problem of idle money, which becomes a cost if not lent out.
Last year, private sector credit grew at a snail’s pace of 3.2 per cent, the lowest over the last 10 years. The last time banks lent so little to the economy was in 2008 - at a growth rate of 0.2 per cent - following the 2007 post-election crisis.
The result is that banks are barely making money off interest on loans. Barclays Bank’s chief executive Jeremy Awori, raised this concern when the lender released its results recently.
“We are facing challenges in interest income revenues. In many instances, we are seeing low, single-digit growth,” said Mr Awori.
Barclays made Sh21.5 billion from loans, up from Sh21.2 billion last year. The country’s biggest lender by assets, KCB, also had flat growth in net interest income, which increased from Sh48.4 billion to Sh48.8 billion.
Non-funded income was also flat at Sh23 billion.
Income from loans by Standard Chartered reduced from Sh13.5 billion to Sh13.1 billion, while NIC’s reduced from Sh13.1 billion to Sh12.3 billion.
Only Cooperative Bank and KCB saw a significant increase in loan income, with the former making Sh1 billion more at Sh32.9 billion while KCB reported Sh52.7 billion in 2018.
This has now forced banks to go back to the drawing board and figure out how they can increase loans to mobilise idle cash while keeping risks low.
Under the rate cap law, banks’ ability to channel credit to the private sector has been curtailed by narrow margins against heightened risks.
This has seen them divert most of their money to the Government through treasury bills and bonds, which carry lower costs of processing and have minimal risks.
However, with virtually all banks lending to the State, returns are lower, leading to flat interest growth.
The banks are seeking innovative ways of lending to small and medium-sized enterprises (SMEs), while reducing risks, a move that has seen them rely on corporate clients as guarantees for the SMEs they deal with.
For instance, Equity Bank signed a deal with the Standard Group that will see the media group’s 3,500 newspaper vendors given loans to ease their cash flows.
The facility, wired through the media house, will be collateral-free, with varying sizes depending on individual vendors’ needs.
Equity Bank’s managing director Polycarp Igathe said working with corporates was an ideal way of accessing the micro, small and medium enterprises (MSMEs), which are currently suffocating from lack of credit.
“This is a partnership to create working capital finance without collateral. All we have to do is identify a certified vendor through ‘know your customer’ credentials from the corporate,” he said.
“We are impressed that a media house thought of this before consumer goods. If it works with a newspaper, it will work with soda and cement industry players. It’s a deliberate decision to go into certified ecosystems to access MSMEs, working with brands like the Standard Group.”
Corporate guarantees offer lenders like Equity Bank knowledge of their partners’ data and balance sheet strength to help them make decisions faster and reduce exposure to riskier borrowers.
Mr Igathe said through the Equitel mobile virtual operator, the bank will be able to disburse loans in a record 20 seconds.
Meanwhile, Jamii Bora Bank says that for supply contract loans, the quality of the borrower’s employer - the one being supplied to - is very important.
The lender also says they are limiting credit to SMEs to short-term trade financing below six months so they can turn around their balance sheet quickly.
“Lending to SMEs needs a very innovative approach and keen understanding of your customer. Relationship must be very close,” said Jamii Bora chief executive Timothy Kabiru.
To gain more knowledge of their clients’ stock performance, Jamii Bora also relies on counter-party data from Safaricom’s Lipa na M-Pesa integrated with the bank’s accounts.
The lender is processing applications to have more merchants registered and at no cost to them, to ensure their funds are deposited into their Jamii Bora accounts real-time, so that they can use the transactions to qualify for quick, short-term loans.
Jamii Bora has embarked on a three-month campaign to link its enterprise customer accounts to Lipa na M-Pesa paybill and till numbers under its trade solutions platform.
“Lipa na M-Pesa is the most widely used channel for electronic payments by traders across the country,” said the head of business development at Jamii Bora, Eunice Waheho.
“As an enterprise bank, we are alive to the fact that this will continue to be the trend, hence the need to align our services to the ever-changing innovations.”
Co-operative Bank of Kenya chose to partner with Brookside, which in turn has a link to 300 cooperative societies in the country, from whom it procures nearly 1.5 million litres of raw milk a day.
To ensure money lent out is safe, the lender committed to train the farmers on performance management and internal controls to ensure that the societies thrived in an increasingly competitive environment.
Co-op Bank, which received Sh15.2 billion from the World Bank Group’s International Finance Corporation (IFC) for onward lending, says it is seeking partners through networking forums that will see it extend loans to small businesses.
The networking platform has already kicked off, with Nakuru hosting a gathering earlier this month.
Co-operative Bank’s director for retail and business banking Arthur Muchangi, said the kitty will include a new unsecured business loan, that will allow businesses to borrow up to Sh2 million through the bank’s MCo-op Cash.
One of the major problems for SMEs has been access to finance, because lenders do not know them well, even after being beneficiaries of seed capital.
SMEs report that to get money from banks, they are usually asked for collateral and given such strenuous terms that repayment bleeds them to death.
They might also be required to operate an account for a certain period before they become eligible for a loan, without the lenders actually understanding their capital flows.
Financial Sector Deepening (FSD Kenya), the World Bank and Central Bank of Kenya, jointly conducted a research project in an attempt to understand the supply and demand side of the SME market. The report highlighted the difficulty in tracking the size of the small businesses and need for financial services.
However, this may soon change as credit reference bureaus (CRB) start developing tools to score SMEs based on their cash flows, ownership, type of business and risks.
One CRB, Metropol, has rated over 250,000 firms, while another, CreditInfo, is currently working on sourcing better data to enable banks increase their lending to SMEs.
The credit rating firms say they are working with Government registries, county governments and other sources to get better company data that can help them provide principal linkages.
This will give a better view of an SME through its directors, while also developing customised SME scorecards to be used by banks to lend to this sector.
Metropol’s chief executive Sam Omukoko, said if the Goverment social funds built up information on the small businesses they help discover or share the information, it would be a game changer.
Potential in the sector lies with initiative’s such the Youth Enterprise Development Fund, Uwezo and Women Enterprise Fund.
Many of the businesses turn to these funds after being locked out of the credit market, but they disappear after getting loans, so there is no radar that CRBs can use because those funds do not share data with them.