I&M Bank Adds To Banks Who Have Borrowed From International Financiers To Lend To Businesses

I&M Bank secured a USD 40.0 million, an equivalent to 4.0 billion shillings loan from the FMO, a Dutch Development Bank, for onward 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, highlighted that the facility would 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.

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.

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 7-years. The current LIBOR rate is at 2.8 percent.

Previously, Equity Group, Co-operative Bank, Diamond Trust Bank, Stanbic Holdings and KCB Group have borrowed from international financiers to mainly fund their onward lending business.

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.

The SMEs businesses have been hit hard following the enactment of the Banking (Amendment) Act 2015 that capped the interest chargeable on loans at 4.0 percent above the Central Bank Rate (CBR). 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 percent in H1’2018 from 7.7 percent in H1’2017, led to a constriction in lending to these businesses.

The move by lenders has had a negative effect on SMEs resulting to a slow growth in the credit extended to the private sector, of 4.3 percent in the last 12-months to August 2018, which remains below the Central Bank of Kenya target rate of 12.0-15.0 percent, and below the 5-year average of 13.0 percent.

This information came from Cytonn Report by Cytonn Investments