Banks turn to global lenders for cheaper cash

Kenyan banks are turning to international lenders for cheaper and long-term funds to cut on their costs of mobilising deposits following last year’s steep increase in interest rates.

Consolidated Bank and ABC Bank are the latest institutions to get funding by an international financier—European Investment Bank (EIB)— which stated that it was in negotiations with other players in the financial sector for funding.

“We are also in discussions with two, three large banks and will be making the announcements in due time. EIB looks forward to working closely with Kenyan banks to help entrepreneurs to expand their business activities across the country,” said Nikolaos Milianitis, resident senior loan officer.

Unlike customer deposits, funds borrowed from development financiers come at low interest rates, long tenures and in different currencies, enabling banks to structure loans mainly in favour of small and micro enterprises especially those in the export business.

The European Union-owned bank advanced Sh770 million to ABC Bank and Sh715 million to Consolidated Bank with a re-payment period of up to 10 years.

In the last three months, German Development Bank has loaned to Equity Bank Sh2 billion, Proparco of France to NIC Bank (Sh1.8 billion) with a tenure of seven years, French development agency AFD to CFC Stanbic and Co-operative bank (Sh3.9 billion equally) for 12 years at an interest rate equivalent to 0.5 per cent above the average three-month LIBOR rate for the first two years.

Large depositors—have been demanding high returns from banks, squeezing their interest rate spreads.

Depositors have also preferred to hold funds in call accounts or short life fixed deposit accounts so as to have them available to take advantage of arising opportunities.

The financing by development institutions has worked in favour of businesses that were initially exposed to high interest rates, with the banks now lending at prices lower than market rates.

Consolidated Bank said it would lend at 17 per cent, a rate lower than that of the Central Bank which is usually used as a reference by lenders before loading a risk premium.

“The funds will be available for a minimum of four to 10 years and at a rate lower than current rates. We are willing to go down to as much as 17 per cent,” said Eunice Kagane, Consolidated Bank’s chairperson.

The international financiers have also been identifying growth-spurring sectors such as infrastructure, energy, agribusiness, construction and education for funding.Most Kenyan banks have shied from long-term lending owing to the nature of their source of funds—mainly customer deposits that are held for short periods.

“We are doing this because we could not lend for more than four years because of cash mis-match. The demand for dollar and euro-denominated loans is also high and we were not meeting it. With this facility we will be able to open up the tenure, pricing and structure,” said Shamaz Savani, ABC Group managing director.

Kenyan businesses that generate revenues in dollars have been keen to borrow in dollars or euros to cushion earnings from currency risks in a market where trading of the shilling is volatile against major currencies.

Lenders such as Diamond Trust Bank have carved a niche in long-term foreign currency lending to small and medium sized enterprises, with the help of financiers such as International Finance Corporation.
gngigi@ke.nationmedia.com