Capital Markets

Sidian inks Sh1.7bn loan guarantee deal with Dutch bank

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Sidian Bank chief executive officer Chege Thumbi during an interview in Nairobi on March 26, 2018. PHOTO | NMG

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Summary

  • Sidian Bank will be insured from loans defaults for up to $15 million (Sh1.7 billion) by Dutch development bank FMO in a move designed to help the Kenyan lender expand credit to small and medium-sized enterprises.
  • At least 30 percent of the loan guarantee facility will back borrowings by young and female entrepreneurs, according to an agreement between the parties.

Sidian Bank will be insured from loans defaults for up to $15 million (Sh1.7 billion) by Dutch development bank FMO in a move designed to help the Kenyan lender expand credit to small and medium-sized enterprises.

At least 30 percent of the loan guarantee facility will back borrowings by young and female entrepreneurs, according to an agreement between the parties.

“This facility under will strengthen Sidian Bank’s ability to provide financing to MSMEs affected by the Covid-19 crisis in Kenya,” FMO said in a statement.

Under the agreement, FMO has committed to absorb some of the possible losses from defaults in Sidian’s loans portfolio.

The lender’s chief executive Chege Thumbi said the loan guarantee will give it the confidence to lend more, especially to customers without adequate collateral.

Lending to SMEs has traditionally been seen as presenting more risk of default compared to lending to large, established private firms and government-owned institutions.

Many small businesses have been hit hard by the economic fallout from the pandemic, further hurting their ability to get loans on the strength of their cash flows.

Last year, a Central Bank of Kenya study showed that banks turned away 28 per cent 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 National Treasury is currently working with multiple banks to insure their loans to SMEs up to a combined value of Sh3 billion.

The participating banks are Absa, Co-op, Credit Bank, DTB, KCB, NCBA and Stanbic.

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.

AGF is owned by a group of multilateral lenders and sovereign wealth funds, including the African Development Bank, Agence Française de Développement and the Danish International Development Agency.

AGF, which has an office in Nairobi, earns about 70 percent of its income from the risk guarantee business.