Co-op Bank lines up SME loan billions after Sh14bn German fund war chest

Co-op Bank Group CEO Gideon Muriuki (3rd right), DEG-Africa Director financial institutions Michael Fischer, Co-op Bank Director Finance & Strategy Caroline Karimi and DEG East Africa Regional Director Antje Steiner among other top officials after signing the $100 Million financing agreement. [Courtesy]

Co-operative Bank of Kenya (Co-op Bank) says it has set aside a Sh14.1 billion war chest for affordable loans to small businesses after securing a $100 million loan deal with German investment corporation DEG to finance small and medium-sized enterprises (SMEs) in the country.

The long-term facility provided by DEG with backing from European Development Finance Institutions including Finnfund, Norfund and the co-financing facility European Financing Partners (EFP) will foster business growth by easing local SMEs' access to finance, representing around 40 per cent of the country's gross domestic product and most of its workforce.

Further, SMEs constitute 98 per cent of businesses in the country and have an annual job creation of 30 per cent of all new jobs.

"The funding by DEG and the Consortium is most timely in view of the great need to better support our business customers. In addition, the long-term tenure of the facility has significantly boosted the bank's ability to offer solutions that are better structured to fulfil the long-term financing needs of MSMEs," said Co-operative Bank Group Managing Director Gideon Muriuki.

The loans under the scheme are aimed at supporting working capital and the acquisition of assets for small credit-starved businesses.

The Africa Agriculture and Trade Investment Fund (AATIF) and Micro Small Medium Enterprises Bonds (MSMEB) also participated in the deal.

"By acting as lead arranger and providing the subordinated loan to Co-op Bank, DEG contributes to the further development of Kenya's financial sector and the wider economy through the creation of jobs and local income, all geared towards the attainment of Sustainability Development Goals," said Monika Beck, Member of DEG's Management Board.

Co-operative Bank headquarters, Nairobi. [David Njaaga, Standard]

Kenyan banks have in recent years taken substantial loans from global funds, including the International Finance Corporation (IFC), European Investment Bank (EIB), Agence Francaise de Developpement (AFD) and the African Development Bank (AfDB), attracted by relatively more favourable terms of debts like lower interest rates and longer maturity.

The CBK last month issued the highest key lending rate hike in seven years, raising the benchmark rate by 100 basis points from 9.5 per cent to 10.50 per cent.

"I think, as I explained, the information that the Monetary Policy Committee had when they made that decision to retain the rate of 9.5 per cent was that it looked like inflation was actually coming down, it had come down from 9.2 to 7.9 per cent. And even non-food and non-fuel inflation had also declined," CBK Governor Kamau Thugge told reporters during his first post-Monetary Polity Committee (MPC) briefing last month.

The rate hike left borrowers staring at a big jump in their monthly loan repayments.

It is against this backdrop of a tightening local credit market that concessional long term facilities sourced from multilateral development institutions become increasingly critical, as Co-op Bank has done with DEG.

The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies, with borrowers set to feel the financial pain of the increased cost of loans.

This could translate into banks tightening their lending standards.

The sharp rise in interest rates already threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring.

If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand-a recipe for a painful recession.

At the same time, higher rates have increased borrowing costs.

This is a concern for banks because borrowers faced with elevated costs may not be able to repay and service their loans, laying the groundwork for banks to toughen their lending.

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