KCB, Kenya’s largest bank by asset base and profit, is set to raise Sh25 billion in debt to support its growth.
The lender is expected to receive Sh7.5 billion from World Bank’s investment arm, International Finance Corporation (IFC), as subordinated debt.
“This investment is part of a $250 million (Sh25 billion) capital raising exercise by KCB to strengthen the Bank’s capital position in the context of the increased regulatory capital buffer requirements while supporting the bank as it expands into the SME segment and invests in alternative delivery channels to deepen financial inclusion,” said IFC in a statement disclosing its planned investment.
KCB’s capital adequacy ratios have been thin giving it little room for growth. Its total capital to total risk weighted assets ratio is 15.9 per cent, marginally above the mandatory 14.5 per cent.
“The bank has successfully concluded the tier two capital raising exercise—a solid base for 2017 growth,” the bank said during an investor briefing held earlier this month.
IFC disclosed that its board had approved a Sh14.5 billion investment in KCB, of which Sh7.5 billion was in the form of debt with the remaining being equity.
The bank’s management in August declared it had shelved plans to make a Sh10 billion cash call and was instead looking at growing its debt levels.
KCB long-term borrowings stood at Sh14.7 billion as at end of September, which was a third of the Sh42.6 billion debt held by its rival Equity Bank – with a smaller asset base.
Long-term debt from international lenders is usually lower priced than local source of funds giving banks a wider revenue margin.
The loans are usually priced at less than five per cent, lower than the minimum seven per cent banks are required to pay for fixed deposits.
International lenders peg the price of their money on the Libor rate – currently 1.6 per cent – plus a premium usually below three per cent.
Recent introduction of interest caps in the banking industry has slashed the revenue margins previously enjoyed by banks making them more cost conscious.
Lending rates are currently capped at 14 per cent.
IFC injected Sh138 million in KCB Rwanda earlier this month to boost lending to small-scale farmers and improve their land’s productivity.
KCB mobile money platform offered in partnership with M-Pesa, launched last year, has over 10 million customers pushing financial inclusion in the country.
Loans issued through the mobile platforms have been growing advising the bank’s decision to increase capital levels.