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Loan default risk cover eases lending to SMEs
A National Bank of Kenya: branch: A new insurance product from ATI is offering banks opportunities to lend more to small businesses with sound business plans. Anthony Kamau
Posted Monday, January 25 2010 at 18:43
The survey, which featured 37 Executives drawn from telecoms, beverages, banking, media, private equity and mining businesses in African Countries, supported the growing belief that Africa is beginning to recover from the global financial crisis.
Mr Mwangi said growth will be led by the manufacturers who realising that banks are not slower in lending have started their own financing models to help their clients acquire the assets they need quickly.
“We have started seeing equipment providers, especially to telecommunication companies choosing to finance their clients through loans,” said Mr Mwangi. “They see credit insurance as a critical component of the financing to hedge against default risks.”
Because of competition, suppliers are being forced to give products and services on credit and seen credit insurance as key to default risk mitigation.
“Businesses have become cautious of trading on credit but the reality is that they do not have options,” said Mr Mwangi.
Credit insurance is usually shunned by most insurers because of the complexities involved in analysing the risk and therefore coming up with an adequate premium.
Failure to come up with adequate premiums means the compensation and reinsurance will be compromised and the whole process could result in losses that drain the insurer.
Local insurers
ATI officials said for such product to be sold by local insurers, capacity building is required. What the agency plans to do is to partner with locals as marketing agents. The Insurance Act does not also allow local insurers to sell credit insurance.
The advantage for locals is that credit insurance can be offered for loans as little as Sh10,000. SMEs can also pay their premiums insurance in installments for a period of six months.
The premium for credit insurance varies based on the risk profile on the borrower or the business the loan is intended to take care of.
The premium averages 2.5 per cent of the total loan and covers 90 per cent of the indemnity risk.
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