Domestic market cringes as depositors prefer their funds in demand accounts and investors are hesitant to buy corporate bonds due to defaults by issuers
Top East African banks are shifting attention to global financiers such as the World Bank’s Private sector financing arm International Finance Corporation (IFC) and the European Investment Bank (EIB) to sign long-term loan agreements on relatively favourable terms to shore up their lending business after failing to secure long-term funds from the local money markets.
The loans are largely meant for financing small and medium-sized enterprises (SMEs).
The EastAfrican has learnt that the local money market is starved of long-term funds largely as a result of depositors putting money in demand accounts while investors being hesitant to buy corporate bonds due to increased cases of defaults by issuers, prompting banks to look elsewhere for long-term funds.
“This is reflective of the trend by local banks which are increasingly seeking loans from global financiers such as IFC and EIB which offer relatively favourable terms of debt in terms of lower interest rates and longer maturity profile,” according to a market report by analysts at Cytonn Investments Ltd.
Kenya, Uganda, Rwanda and Tanzanian markets are struggling to attract companies to issue debt instruments as investors shift preference to the risk-free government bonds largely due to their relatively better returns and uncertainties surrounding debt repayment in the corporate bond market.
Available data shows that about eight banks in the region, notably Equity Bank, Co-operative Bank, KCB, CRDB, Diamond Trust Bank, Bank of Africa, NCBA (formerly NIC bank) and I&M Bank (Rwanda) are either on the IFC or EIB funding programme.
Last week, the IFC announced a $50 million loan to Equity Bank Kenya to help it increase working capital and trade-related lending to its SME clients, especially those facing Covid-19-related challenges.
The loan, which is expected to support hundreds of Kenyan businesses in the manufacturing, health, trade, transport, and consumer goods sectors, is part of IFC’s global $8 billion fast-track Covid-19 facility designed to help businesses maintain operations and jobs during — and after — the Covid-19 crisis.
“IFC’s loan is part of our business continuity management plan, will help Equity Bank extend much-needed support to our clients, particularly to SMEs in sectors hit hard by Covid-19,” said James Mwangi, the chief executive, Equity Bank.
Smaller businesses are the lifeline of Kenya’s economy, accounting for about 81 per cent of employment.
Last year, Equity also received a $100 million subordinated loan from IFC to grow its lending operations in Kenya. IFC’s portfolio in Kenya stood at $884 million as of June 30, 2020, with investments supporting growth and jobs in the financial, manufacturing, agribusiness, services, infrastructure, and other sectors.
In 2017, the European Investment Bank offered three lines of credit totaling $126 million to three East African banks — African Banking Corporation, NIC Bank (now part of NCBA bank) and CRDB — for investment by SMEs across the region.
In 2018, the EIB also agreed to a new $40 million financing facility with I&M Bank (Kenya) to support investment by businesses across the country.
In the same year, the IFC signed a $10 million subordinated loan with I&M Bank (Rwanda) to strengthen the bank’s capital base, and help it increase lending to SMEs, followed by a two-year $500,000 advisory project to help the bank expand access to finance for small and medium enterprises (SMEs).
In January this year, Co-Op Bank entered into a deal with IFC for the provision of advisory services aimed at enhancing the lender's capacity in lending to SMEs.
A survey by the International Trade Centre titled SMEs Competitiveness Outlook 2020 whose findings were released last month shows that the lockdown by governments to contain the spread of coronavirus has led to major revenue drops for most SMEs and the survival of many is at stake.
Supply chain glitch
“With the majority of global employment depending on the health of SMEs, the future of the global economy will very much depend on how SMEs manage to get through, and emerge from, the crisis,” according to the survey.
According to the report, women-led firms operate in many of the industries most immediately affected by the crisis, such as accommodation and food as well as retail and wholesale.
“Providing micro, small and medium-sized enterprises (MSMEs) with an ecosystem that nurtures investment and opening borders for their development is a precondition for post coronavirus recovery — and beyond, it is a foundation for resilient economic and social development,” according to the survey.
“The trade environment in Africa today, coupled with the even greater challenges of limited access to finance and small national markets, does not encourage MSMEs to grow beyond their borders.”
According to the survey African exporters may lose more than $2.4 billion in global industrial supply chain exports due to the shock caused by factory shutdowns in China, the EU and the US.
More than 70 per cent of this loss results from the temporary disruption of the supply chain linkages with the EU.