Markets & Finance

Equity gets Sh8.3bn IFC loan for small business lending

The International Finance Corporation (IFC) will advance Equity Bank $100 million (Sh8.34 billion) to boost the bank’s lending to small businesses and expand its regional business.

The IFC, the World Bank’s private lending arm, has disclosed its intention to lend the bank money through a disclosure paper dated February 8.

The proposal is up for discussion at an IFC board meeting set to take place on March 14.

The IFC said that lending to the small and medium size enterprises (SMEs) are key for growth of Kenya’s largest bank by customer numbers. Advisory services on financing SMEs operations, which will include lending to the agricultural sector and women entrepreneurs, are part of the Sh8.3 billion loan package.

The IFC said that lending to small firms will create jobs as these businesses are expected to be the economic drivers with regional trade growing more vibrant.
“The improvement in access to finance for SMEs will help to generate employment at the grassroots level and further facilitate regional trade, which is expected to grow rapidly following the economic integration of the East African Community,” said the IFC disclosure statement.

The IFC has been lending to commercial banks, which in turn disburse loans to small businesses.

Last year, the corporation loaned Kenya Commercial Bank $105 million for SMEs and the mortgage market with $5 million injected into its expansion in Rwanda.

A year before Diamond Trust Bank received $25 million for SME lending in a trend, which analysts said is likely to pick.

Francis Mwangi, a research analyst at Standard Investment Bank, said that sourcing funds from international lenders help local banks secure long-term loans, which are not available locally.

Banks, he said, find it difficult to obtain loans of between two and 15 years tenor since deposits are usually for one year, which means that they have to offer depositors high interest rates.

Since the Central Bank of Kenya (CBK) increased rates towards the fourth quarter of last year, the banking industry has found it hard to obtain funds.

Last year, CBK increased its base rate to 18 per cent from six per cent and as a result banks have increased their loan charges to 25 per cent. The high interest rates in the market make bond issues imprudent at the moment.

The money, Mr Mwangi said, is likely to come in portions as opposed to a one-off loan as a precautionary measure.
“The money coming in tranches is pretty much to safeguard the lender,” he said.

adding that the IFC also looks at how successful the first tranche was before rolling out the next one.

The IFC is a development lender which lends to commercial banks at low rates for on-lending to end recipients, said economists.

Nelson Wawire, head of the macroeconomics at Kenyatta University said that by offering long-term loans, the effect is that the money can be made available at interest rates lower than market rates.

“The lower interest rates should at least spill over to the businesses getting this money,” said Dr Wawire.

SMEs and women entrepreneurs can only benefit if the lower rates are passed on by the bank.

Analysts said that while the move to stretch its tentacles in the region will pay off, the bank will have to wait for the numbers.

KCB reported that all its subsidiaries in the region returned a profit in the last financial year after kicking off aggressively expansion in 2001.

Equity Bank branched out of Kenyan borders in 2009.

The bank operates in South Sudan and Rwanda, countries where another commercial bank, DTB, has also said are target markets for its regional expansion.