Loan default risk cover eases lending to SMEs

A new insurance product that covers against the risk of loan default is promising to change Kenya’s lending market, offering opportunities for banks to lend more to small businesses with sound business plans.

The product is being offered by Africa Trade Insurance Agency (ATI), with local insurance companies set to become marketing agents.

While insurance against loan default exists in Kenya, the cover only pays claims upon death or permanent disability of the borrower like in the case of mortgages where one is required to have a life insurance cover.

But the new product from ATI covers default risks when the borrower is alive but in financial difficulties, waiving the need for collateral altogether.
Lack of collateral has been a major impediment to borrowing especially for small and medium scale entrepreneurs, even when they have sound business ideas.

“It’s a major development that will push lending faster, said Mr Ochieng Oloo, a consultant on banking and insurance.

The product comes at a time when small businesses in Kenya may be compelled to increase their production to service markets within the East Africa region especially after the coming into force of the EAC Customs Union.

ATI introduced the insurance product last year but its roll out has been in the back burner as the company prioritised the political risk insurance cover that is being sold through UAP, APA and Jubilee Insurance companies.

“We are going to do major marketing of the product this year,” said Mr Humphrey Mwangi, ATI’s chief underwriting officer.

The new product could have a huge impact on reducing the amount of non-performing loans in the banking industry because the risk of default will be substantially reduced, resulting in a significant drop in interest rates. Central Bank of Kenya data shows that overall, gross non-performing loans increased by Sh4.1 billion or 7.1 per cent from Sh57.4 billion in November, 2008 to Sh61.5 billion in November, 2009.

CBK attributed high non-performing loans to slowdown in economic activity because of drought, the negative effects of the post election crisis and the global financial crisis.

The data also shows lending by banks was less than in the previous year because of fear of default as general economic activities slowed down.
Domestic credit grew by 15.7 per cent in the year to November, 2009 compared to 22.6 per cent in the year to November 2008, reflecting reduced appetite for credit in the private sector and the lenders aversion to risk in a depressed economy.

Private sector borrowing decelerated from 32.1 per cent in the year to November, 2008 to 10.8 per cent in the year to November 2009, remaining below the targeted growth rate of 12.0 per cent.

Credit insurance is a growing business in Africa and with ATI having monopoly in the region, it forecast that it will be a key driver in its revenue in 2010.

Growth is expected from the rebounding global economies and growing interest to invest in emerging markets like those of the region.

Recent survey by AfricaPractice showed business leaders in Africa are optimistic for 2010, with 95 per cent of the respondents expecting to expand their businesses over the year.