World Bank lends Equity Sh5 billion for SME loans

The Kenyan banking subsidiary of Equity Group #ticker:EQTY is set to receive a $50 million (Sh5.3 billion) loan from the private sector arm of the World Bank for onward lending to small businesses hurt by the global Covid-19 pandemic.

The International Finance Corporation (IFC) made the disclosure of the multi- billion shilling support to Equity Bank, which has taken a cash preservation strategy, including recalling Sh9 billion in dividends and dropping the purchase of four banks outside Kenya.

The new loan will allow Equity Bank to maintain lending to the risky small traders and firms, who have been hard hit by the economic effects of the Covid-19 pandemic — lowering their ability to save and tap loans.

“The proposed IFC investment is a senior loan of up to $50 million (Sh5.3 billion) with a tenor of one-year renewable,” IFC said in its investment disclosures.

“The investment will help expand the bank’s lending operations to the micro small and medium enterprises (MSMEs) segment in Kenya, especially to companies whose cash flows have been disrupted by the outbreak of the coronavirus pandemic.”

The new loan will cement IFC’s position as the biggest lender to the country’s second-largest bank by assets.

Equity had borrowed a cumulative Sh17.4 billion from the global financier as of December 2019 and the upcoming credit line will raise the total to Sh22.7 billion.

Small firms, which rely heavily on bank loans for growth and working capital, are among the victims of measures taken to control the spread of the coronavirus that was first reported in the country in mid-March.

These include a national night curfew, ban of international travel, closure of bars, schools and cessation of movement into and out of counties hit hard by the disease, including Nairobi and Mombasa.

Banks, which have so far restructured loans worth Sh679 billion or 23.4 percent of their loan book in Kenya due to the pandemic, have become more cautious about extending new credit lines. The Central Bank of Kenya has warned that small and medium businesses need urgent help to survive the economic slowdown caused by the novel coronavirus, and many are at risk of shutting down.

IFC says the new credit facility will empower Equity, which channels about 65 percent of its loan book to SMEs, to make new loans to customers.

“By sustaining the bank’s ability to provide working capital and trade finance, IFC’s facility is intended to promote the resilience of trade finance markets, as well as broader stability that comes about by providing for the going concern of market participants in Kenya,” the financier said.

“IFC anticipates that the project will help best position the private sector to support the economic recovery process, shortening the time it will take for the most vulnerable to return to their traditional income-earning opportunities.”

IFC did not disclose the cost of the loan but noted that it will be senior – rank above other loans with regard to claims on the bank’s assets.

Firms that are expected to benefit from Equity’s onward lending of the IFC loan are those fitting the set criteria such as having between 10 and 300 employees or annual sales of Sh10 million to Sh1.5 billion. The loan size per borrower will range from Sh1 million to Sh200 million. Equity will become the first Kenyan bank to get a loan from IFC under its specific programme to support lenders during the pandemic.

The pending transaction marks the international financier’s increased lending to local banks, with the institution having provided billions of shillings to companies such as Co-op Bank and KCB Group.

Local banks are increasingly taking substantial loans from global funds such as the IFC, European Investment Bank (EIB) and Agence Française de Développement (AFD), attracted by relatively more favourable terms of the debt including lower interest rates and longer maturity.

The lenders have complained of a mismatch between long-term loans and deposits that are mostly short-term in nature, exposing a gap that they have chosen to fill by credit from the institutions which charge single-digit interest rates.

The biggest risk they face in repaying the dollar and euro-denominated loans is a weakening of the Kenyan shilling in which they receive their revenues.