SBM Bank Kenya has agreed a deal worth up to Sh1.1 billion with Africa Guarantee Fund (AGF) to insure against SME loan defaults, allowing the lender to expand credit to small enterprises that come with heightened risk perception.
The loan guarantee facility, which will prioritise women-led enterprises, is expected to be formally signed between the two parties today.
“The facility will unlock opportunities for the MSMEs and women-led enterprises to access credit on favourable terms, unlocking the challenges they experience in scaling up their businesses and their contribution to wealth creation and job opportunities,” the bank said on Friday.
Under the agreement, AGF has committed to absorb some of the possible losses from defaults in SBM loans portfolio.
The lender expects the loan guarantee will give it the confidence to lend more, especially to customers without adequate collateral.
Lending to SMEs has been seen as presenting more risk of default compared to lending to large, established private firms and government-owned institutions.
Last year, a Central Bank of Kenya study showed that banks turned away 28 percent of small businesses while microfinance institutions declined 96 percent of their loan applications.
Credit guarantee schemes are seen as a means of motivating banks to advance more loans to SMEs which employ most people.
The Treasury is working with multiple banks to insure their loans to SMEs up to a combined value of Sh3 billion. The African Guarantee Fund (AGF) is another provider of loan insurance in the local market.
AGF typically guarantees half of the value of a loan balance to a single borrower or half the value of an outstanding loans portfolio and charges banks a fee of between 1.5 percent and three percent for the risk guarantee.
The institution previously said it experiences a default rate of two percent on average for the SME loans it insures.