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Equity to switch Sh150bn State bonds for SME loans

James Mwangi.
Equity Bank CEO James Mwangi. FILE PHOTO | NMG 

Equity Bank #ticker:EQTY has lined up Sh150 billion for lending to small businesses in a sharp policy shift that will see the lender offload billions worth of Treasury bonds accumulated in the past three years.

The bank, which Thursday announced a Sh6.2 billion net profit for the three months to March, says it will channel more of its loans to small and medium enterprises (SMEs) to boost its profit margins.

Equity has increased its holding of government debt to Sh169.7 billion in nearly three years, compared with Sh73 billion held in June 2016, the last reporting period before the introduction of controls on cost of bank loans.

The interest rate cap saw banks cut back on lending to SMEs and individual borrowers, preferring instead to pile their cash in the lower-risk Treasury bills and bonds.

“We are saying that Sh150 billion needs to go back into the real economy, to the micro-businesses and individual consumers.

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"We are using the reduced cost of lending and reduced cost of infrastructure to be able to lend to the whole population at 13 percent,” said Equity Group CEO James Mwangi at a media briefing Thursday.

Minimum return

Last year’s amendment of the interest rates control law removed a requirement for banks to pay a minimum return on customer deposits, thereby widening profit margins on consumer and business loans.

Banks have also seen a narrowing of income from Treasury papers, whose interest rates have been on a decline.

Mr Mwangi cited reduced cost of disbursing loans to customers as another factor behind the shift back to SMEs lending.

Equity has been among the most aggressive banks in pushing lending to government during the rate cap regime, a factor that has been blamed for an overall drag on private-sector driven economic growth.

Mr Mwangi said the bank is now converting maturing bonds into customer loans to cut the re-investment risk in treasuries, where rolling over is expected to yield lower returns.

“We have in the past two years focused on reducing the cost of delivery by digitising loans. Now 93 percent of our loans are being delivered through the mobile platform, thus reducing operational costs,” said Mr Mwangi after releasing the bank’s first quarter financial results.

Boost transactions

The bank is also hoping to boost its transactions income from pushing more customer loans. Equity’s net interest income was up by six percent to Sh10.4 billion between January and March, while non-interest income rose by seven percent to Sh7.2 billion.

The bank’s loan book grew at the same pace as lending to government at 13 percent to Sh305.5 billion and Sh169.7 billion respectively.

The lender holds Sh428.5 billion in customer deposits, which translates to a loans to deposit ratio of 71.3 percent, thus leaving significant headroom to lend more to customers.

Equity’s share price dropped 2.8 per cent on announcement of quarter one results to close at Sh40.50 a piece, in what Standard Investment Bank termed as “an indication of investors’ dissatisfaction with the performance.”

The move by Equity is welcome news for SME borrowers, who have largely been excluded from the credit market by banks under the interest rate cap regime.

Biggest employers

SMEs are the biggest employers and drivers of Kenya’s economy yet they are deemed by the lenders to be among the riskiest borrowers, with banks arguing that they are unable to price-in risk due to the rate cap.

Latest Central Bank data shows that private sector credit grew by 3.4 percent in the 12 months to February, a far cry from the 12 to 15 percent seen as ideal for spurring robust economic growth.

The lack of credit to private businesses means that the economic growth of 6.3 percent is not being felt by the man on the streets, with many losing jobs due to poor performance by businesses.

Loans under the controlled regime are capped at four percentage points above the prevailing Central Bank rate (CBR), which currently stands at nine percent.

The deposit rate for interest earning accounts had a floor of 70 percent of CBR, but a review of the rate cap law last year saw this removed, thus giving banks room to widen their interest margins.

High Court ruling

The lenders are now banking on a High Court ruling that found the rate control law unconstitutional and gave the National Assembly a year to review it.

The prospect of a friendlier law is likely to see banks begin to shift back to customer loans in anticipation of rates going up if they are allowed to price-in risk on debt.

Equity expects to pump in about Sh420 billion to SME lending in the next five years, largely by leveraging on the recently agreed partnership with telecommunications firm Safaricom that already has extensive reach through its mobile money platform.

“Realising the limitation we have, we have chosen to partner with Safaricom so that we can use their capability of technology and data analytics to reach the SMEs,” said Mr Mwangi.

The bank will mainly target the agriculture, micro and small enterprises, manufacturing, low cost housing and health in the drive.

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