Easy access to loans for SMEs boost economic activities and bank profits

Banks profits jumped 41.7 percent in the five months to May on increased lending and lower costs tied to loan defaults, pointing to continued recovery from Covid-19 economic hardships. Data from the Central Bank of Kenya (CBK) shows that the pre-tax earnings in the five months rose to Sh 76.4 billion from Sh 53.9 billion posted in a similar period last year, when Kenya imposed Covid-19 restrictions.

This hike came in a period when banks increased lending and cut the size of non-performing loans (NPLs) due to a rise in repayments and property auctions. Slowed lending that followed reduced economic activity after Kenya’s first Covid-19 case in March and costs linked to provisions cut lenders profits 29.5 percent last year.

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The Central Bank of Kenya has retained its benchmark lending rate at 7 percent noting that the current monetary policy measures remain appropriate.

The banks’ regulator which held its Monetary Policy Committee said that leading indicators for the Kenyan economy point to a relatively strong GDP recovery in the first half of 2021.

The committee also cited that inflation expectations remained well anchored within the target range and the economy however continued to operate below its potential level in the period under review.

The MPC’s survey also noted that the banking sector remained stable and resilient with strong liquidity and adequate capital ratios.

Demand of lending increases in the private sector.

The era where commercial banks shied from lending to small businesses in Kenya seems to be ending as per the latest report by the Central Bank of Kenya .

The number of loan applications picked up in June, reflecting improved demand with increased economic activities.

Progress was noted with regard to lending under the Credit Guarantee Scheme, said CBK.

The scheme was allocated Sh12 billion in the current financial year. The government covers up to 25 percent of the loan capped at Sh5 million disbursed through seven banks.

Commercial banks expect increased credit extension this year pegged on recovery in    economic activity in key sectors such as manufacturing, transport and trade, according to CBKs market perception report

This was attributed to the easing of Covid-19 restrictions, the continued rollout of vaccinations, and expectations of lower credit risk as business operations improved. In the period under review, the ratio of gross non-performing loans (NPLs) to gross loans stood at 14.0 percent in June compared to 14.2 percent in April. Repayments and recoveries were noted in the manufacturing, agriculture, trade, and  real estate sectors.

At the same time, leveraging on the speed up of digitalization, banks have continued to roll out innovative products targeting underserved segments including women, youth, and Micro, Small, and Medium Size Enterprises (MSMEs). The central bank took action last year to help these businesses to survive the economic slowdown brought about by the coronavirus, with many at risk of shutting down.

As part of these measures aimed at cushioning distressed borrowers, the central bank allowed banks in March 2020 to restructure loans for those firms hit by the Covid-19 pandemic.

With this step most SMEs used the products to improve on the way they managed their businesses from learning new skills of management to investments ideas to add on what they had.

The CRB listing relief was part of a motivational package to cushion distressed businesses and individuals from the effects of the coronavirus pandemic. Since most SMEs borrow and delay to pay, relief made most of them not to have pressure of paying with a deadline but to focus on how their business will bring profits to pay their loans.

On average, SMEs borrowers took 30 months to repay loan facilities as of December 2020, compared to 2017 where the average loan tenor for MSMEs ranged from 15 to 40 months.Loans to micro-enterprises had the shortest average repayment period at 18 months, with small and medium enterprise loans taking 30 and 41 months respectively to repay.

Time given to them made most of these businesses to achieve their targets and paying their loans. The MPC data released by CBK last week shows that borrowers have started repaying loans, with the non-performing loans rate dropping to 14 per cent from 14.2 per cent in May.

How the economic activities and banks have been boosted by SMEs.

Profitability at Kenyan lenders is showing signs of improvement, according to CBK figures. The reduction in the average loan size largely attributed to a differential increase in the value of the loan portfolio as compared to the number of loan accounts. Lending to SMEs generated Sh 70.8 billion for the banking industry, representing 12.2 per cent of the total income generated from lending by the banking industry.

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In October, the government set up a credit guarantee scheme for small and medium-sized businesses hit by the coronavirus and said it expected its capital to eventually rise to at least 100 billion shillings. The easing of restrictions and rollout of Covid-19 vaccines has triggered a gradual recovery in the economy, prompting banks to boost lending amid repayment of defaulted loans which reduced provisions

Kenya expects its economy to rebound this year with the finance ministry forecasting   economic growth of 6.6% in 2021 compared with 0.6% in 2020 when industries like tourism and related services collapsed due to Covid-19-related restrictions.

Mombasa, Kenya.

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