The Kenyan banking subsidiary of Equity Group
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.
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