KCB Group is set to get a Sh12.9 billion seven-year loan from the International Finance Corporation (IFC) for lending to mortgage borrowers and SMEs, giving it an edge over rivals who have to pay higher interest on deposits.
This will be the second such concessionary credit facility for the bank, which is Kenya’s biggest lender by assets and profitability.
The World Bank’s private lending arm, IFC, has revealed details of the proposed seven-year loan amounting to $150 million (Sh12.9 billion) in a disclosure note seen by the Business Daily.
IFC says the loan will be used for “increasing access to finance and extending tenors of credit facilities to a number of key sectors for the economy namely, SMEs, agribusiness and housing.”
In August 2011, KCB got Sh9 billion ($105 million) from the IFC.
The World Bank loans ordinarily have a social impact element attached to them, and this particular tranche is for on-lending to mortgage borrowers, small and medium-size enterprises (SMEs) and agricultural enterprises across East Africa.
KCB repays the loans at a small premium above the London Interbank Offered Rate (Libor).
The medium-term facility will give KCB room to lend long-term, helping to bridge the mismatch between the short-term nature of customer deposits and the growing demand for long-maturity loans.
“The loan would allow the bank and its subsidiaries to extend the tenor of its facilities, targeted at a number of priority sectors, without introducing unsustainable maturity mismatches into the balance sheet,” says the disclosure note.
KCB’s loan book stood at Sh211 billion as at the end of 2012 up from Sh198 billion a year earlier reflecting a 6.5 per cent growth.
Analysts said that for the lender to maintain its profit growth momentum it has to give more long-term loans.
KCB was Kenya’s most profitable lender in 2012 having made Sh12.2 billion in after-tax profit compared with Sh10.9 billion in 2011, an 11.9 per cent increase.
“They need to be more aggressive in lending, it is critical that they match long-term lending with long-term funding,” said Faith Atiti, a research analyst at NIC Securities.
Short-term customer deposits are expensive to maintain and banks have been reaching out to lenders such as IFC who have the capacity to give long-term, large loans at low rates.
The IFC has loaned to HF $20 million, Equity Bank $100 million, and Co-operative Bank $65 million.
The disclosure note on KCB’s deal did not say at what rate the proposed loan would be given, but a similar facility taken by Co-operative was advanced at single-digit rates, compared to customer deposits which attract double-digit interest rates.
A research note by Old Mutual Securities says IFC’s facility with Co-operative Bank attracts an interest rate of between 2.5 and 3 per cent above the Libor rate.
The proposed funds for KCB are to be loaned to all its East African subsidiaries, but no breakdown was given on how would go to each region.
KCB is present in Kenya, Uganda, Tanzania, Rwanda, South Sudan and Burundi.
The lender has said that it will focus on regional expansion this year in addition to increasing transaction through third parties.
“With eight new branches in 2012, the total branches across the region now stands at 230 and entry into Burundi completed, management guides focus in 2013 will be to leverage on agency and mobile banking,” said a report on the bank by Standard Investment Bank.
The lender’s profitability was attributed to the loan book increase in a regime of high interest rates.
The high lending rates are expected to prevail in tandem with the rising rate of inflation, which increased for the second month in a row in February.
Data from the Kenya National Bureau of Statistics shows that the rate of inflation stood at 4.45 per cent in February up from 3.67 per cent in January.
The rise in the inflation rate was mainly driven by increases in the cost of food as well as fuel prices.
A rising rate of inflation will discourage the Central Bank of Kenya’s Monetary Policy Committee from reducing the base rate, which currently stands at 9.5 per cent.