Equity Bank woos SMEs with low-cost dollar loans

Equity Bank has received a Sh2 billion loan from a German development lender that will allow it to offer low-cost credit to small and mid-sized businesses in dollars to cushion them from currency risks.

Borrowers, mainly involved in cross-border business, will get long term loans at between five per cent and 12 per cent—which is lower than Kenya’s average lending rate of 18.5 per cent.

The bank and KfW (the German Development Bank) did not disclose loan terms, including tenure and the interest charge it will attract.

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.

“Customers who borrow from us in dollars will have a competitive edge in their markets ahead of those whose loans are more exposed to currency fluctuations,” said James Mwangi, the Equity Bank CEO.

He added that the facility will help the export oriented businesses match their assets and liabilities as well as help Equity to grow its share of the SME lending market.

The bank joins the ranks of Diamond Trust Bank that has carved a niche in long-term foreign currency lending to SMEs with the help of financiers such as International Finance Corporation.

Currency swings

The foreign currency dominated loans have been thrust to prominence by the sharp fluctuation of the Kenya shilling against major currencies in the past five months.

For instance, the shilling has oscillated between Sh107 and Sh85 to the dollar since mid-October.

This has wreaked the import plans, especially those of small firms that unlike large companies have weak muscle to cope with sharp rise in import bills occasioned by currency swings.

In recent years, Equity has relied on foreign banks like China Development Bank, Dutch FMO and Dexia Micro Credit to support its SME and property business. It owes the foreign banks more than Sh10 billion.

Most of these loans attract an interest charge of less than 10 per cent, which bankers say is lower than the cost of gathering deposits.

The foreign banks — most of them owned by states — loan local banks to grow their lending arms and reduce poverty in emerging countries, hence their associations with micro finance lenders.

“Financial inclusion and penetration in emerging markets is still low and we are seeking partners with the outreach for us to tap into this opportunity,” said Dr Thomas Duve, the KfW director for Africa regional programmes.