The Treasury is seeking changes that will allow banks to make lesser provisions for defaults on partially guaranteed loans micro, small and medium enterprises take, aiming to expand lending to the businesses.
Currently, the Central Bank of Kenya (CBK) guidelines on capital adequacy do not offer banks the benefit of issuing loans whose potential default will be covered by third parties.
The lenders have been treating such credit facilities just like other loans — making provisions based on actual and anticipated defaults— despite the fact that they are less risky due to the guarantee.
“Although credit guarantees provide partial coverage to borrowers, there is no framework for recognition of capital relief benefits passed on to financial intermediaries lending under guarantees in the country,” the National Treasury states in the credit guarantee policy draft.
“A framework for recognition of the value of a partial guarantee is therefore key as this will provide an incentive to the financial intermediaries to pass concessionary benefits in terms of reduced interest and collateral requirements to end MSMEs borrowers.”
The move, if adopted, will free up capital for commercial banks that use the various credit guarantee schemes.
The CBK places a capital charge for credit risk arising from the possibility of losses associated with the reduction of credit quality of borrowers or counterparties.
There being no recognition for partial guarantees, loans and advances under such schemes attract a 100 percent weighting on risk, meaning that commercial banks must fully provide capital on expected losses from such facilities which slow down disbursements as a capital preservation measure.
In contrast, loans guaranteed by the government have a zero weighting on credit risk, meaning that commercial banks do not set aside capital to cushion against the potential for defaults.
The recognition of the benefits accruing from partial guarantees is seen as a revitalisation of the State-backed credit guarantee scheme that is delivered through a risk-sharing agreement between the government and banks.
Development finance institutions
The recognition of partial guarantees will also allow relief on loans and advances disbursed under the guarantees of development finance institutions such as the African Guarantee Fund, the Kenya Development Corporation and the International Finance Corporation (IFC).
The Treasury-backed scheme has seven participating banks including Absa, Co-op, Credit, DTB, KCB, NCBA and Stanbic.
The scheme guarantees to pay the banks 50 percent of the outstanding principal amount, subject to a maximum of 25 percent of the principal amount in case of default on qualifying credit facilities advanced to MSMEs.
