NAIROBI, KENYA, OCTOBER 10 — I&M Bank has secured a US$40 million(Ksh4.03 billion) loan from the FMO, a Dutch Development Bank, for lending to small business enterprises (SMEs) in what is expected to boost their operations, currently hampered by cautious lending towards the segment.
FMO’s Chief Investment Officer, Linda Broekhuizen, has confirmed that the facility will be used primarily for onward lending to SMEs, thus supporting the expansion of I&M Bank’s strategy to increase its SME loan book, and in the process aid in boosting the local economy.
“By supporting the expansion of its operations, FMO can help give the local economy an extra boost,” Broekhuizen said in a statement.
SMEs businesses in Kenya have been hit hard since the enactment of the Banking (Amendment) Act 2015 that capped the interest chargeable on loans at 4.0 per cent above the Central Bank Rate (CBR, currently at 9.0 per cent. The law came into place in September 2016.
Inability to price SMEs within these margins coupled with the continually deteriorating asset quality, evidenced by a rise in gross Non-Performing Loans ratio to a weighted average of 10.0 per cent in half one of 2018 from 7.7 per cent in 2017, led to a constriction in lending to these businesses.
The move by lenders has had negative effect on SMEs resulting to a slow growth in the credit extended to the private sector of 4.3 per cent in the last 12-months to August 2018.
This remains below the Central Bank of Kenya target rate of 12.0-15.0 per cent and below the five-year average of 13.0 per cent.
In recent years, Kenyan banks have taken on substantial loans from international financiers, including International Finance Corporation (IFC), European Investment Bank and the African Development Bank (AfDB).
Development banks such as FMO offer attractive terms on their lending to commercial banks, including lower interest rates and longer maturity periods.
To date, I&M Bank has secured a total of about US$1.2 billion (Ksh121.1 billion) of which about 30 per cent of the loan portfolio has been channeled towards SME lending.
Local banks that have secured similar kitties in the past and recent times include Equity Group, Co-operative Bank of Kenya, Diamond Trust Bank, Stanbic Holdings and KCB Group , which have all successfully borrowed from international financiers to fund their onward lending business.
In February this year, Co-op Bank secured a $150 million (Ksh15.2 billion) seven-year loan from the World Bank arm IFC for lending to small enterprises.
KCB on the other hand secured $100 million from AfDB for onward lending to SMEs.
Previous issues such as that of the International Finance Corporation (IFC) to Co-operative Bank were priced at the London Interbank Offered Rate (LIBOR), plus a premium, which is unspecified, and for a period of seven-years. The current LIBOR rate is at 2.8 per cent.
“The asset-liability mismatch by tenor due to the relatively long-term nature of loans and short-term nature of deposits exposes a gap that banks have chosen to fill will with credit from the international financiers,” Investment firm-Cytonn said in a recent report.