Kenya: SME Lending Attracts More Financiers, Including Banks

By Winfred Kagwe, Nairobi Star

It has been repeated over and over that the biggest hindrance to growth of indigenous businesses is lack of access to financing.

The survival rate of up to two to three years presumed for the small and medium enterprises (SMEs) has been because despite having very innovative ideas, funds to fully commercialise have not been readily available, especially with little to show as security.

But there could be some hope for small businesses as more and more sources of finances continue to emerge, from private equity to more banks showing willingness to lend them money. Microfinance lenders and co-operative societies may have been the main source of hope for financing for new entrepreneurs, but suddenly funds may be coming from different-and unexpected sources. Banks that had been concentrating on corporate banking, asset, investment banking or big trade financing suddenly have increased interest in small and medium -even micro – enterprises.

Earlier in the last decade, Equity Bank focused on giving out microloans. This may have attracted the industry’s attention but other financiers stood by and watched. It took some years for other big banks to go the SME way, but for the last few years saw other big ones like Kenya Commercial Bank, Barclays Bank, Standard Chartered establish their own SME segments to grow their loan books.

And now, the mid-tier banks, aspiring to join the big league are banking on the micro, small and medium sized enterprises to grow bigger. Last week, CFC Stanbic Bank, a subsidiary of South Africa’s Standard Bank Group, put venturing to SME banking top of its immediate future strategy. CfC Stanbic, which has been majorly offering corporate products, now plans to grow its lending to SMEs to constitute up to 40 per cent of its retail banking.

Diamond Trust Bank, one of the fastest growing banks in the region, now has 90 per cent of the accounts held by SMEs. With its regional reach, DTB has been targeting SMEs in east Africa. In effect up to 58 per cent of its loan book is to this group. ” This will not only help DTB position itself as premier SME banking institution, but also promote job creation,” said DTB Chief Financial Officer, Alkarim Jiwa while acknowledging receipt of $450 million(Sh38.25 billion)from International Finance Corporation since 2008 which has been extended to SMEs.

Bank of Africa has also been notably visible in reaching out to micro investment groups, popularly known as ‘chamas’ in a bid to reach to the startups at their earliest stages. BOA says it has grown its SME segment to account to account for up to 25 per cent of its loan book. McKinsey & Company, a research company, has over the last six months conducted a research on Micro, Small, Medium Enterprises (MSMEs) in emerging markets. The report, titled ‘how banks can grasp a $350 billion opportunity’ was based on interviews with 30 leading banks across the emerging markets (Asia, Latin America, Middle East, Africa, and Eastern Europe), sizing of the opportunity overall and by sector.

The survey found that the emerging market MSME banking opportunity is large and growing fast, it is set to grow to USD350 billion+(Sh29.75 trillion) by 2015, which is approximately USD 220 billion(Sh18.70 trillion) larger than in 2010. This growth is larger than the growth over the same period of the global investment banking and asset management revenue pools combined, of approximately USD 180 billion(Sh15.30 trillion).

The emerging market MSME banking opportunity appears profitable, of the 30 banks interviewed, a large majority are earning a return on equity (RoE) in excess of 25 per cent. “We estimate that banks can increase RoE from the MSME segment from approximately 15 per cent to 35 per cent by applying five leading practices,” says Mutsa Chironga ,an Associate Principal at McKinsey & Company.

Such practices include, seeking granular understanding of clients which can enable banks capture 70 per cent of the revenue pool by focusing on specific MSME sectors, such as retail, agriculture, manufacturing, hospitality. But there is still a risk, and the lenders have to employ new tactics to reduce the possibilities of defaults by SMEs. CfC Stanbic, for instance, has now employed a new way of make a distinction between viable borrowers and getting rid of those with a higher risk of default risk.

According to Elly Odhong’, the bank’s Head of Personal and Business Banking, it is now employing a psychometric test to vet potential clients. This is a computer tool that gives score depending on how the potential borrower answers the questions. This is already being used in CfC Gikomba branch, one of the most lucrative hub for business people. “Knowing the risk will significantly reduce the cost of issuing loans to small businesses, so that we can be able to offer competitive rates in the market,” Odhong’ said.

Chironga says by lowering operating costs can be done for example lowering distribution costs by 30-40 per cent by use of agents or mobile money, already in use by Kenyan banks. Another way is by innovatively managing risk, for example lowering credit losses by 30-40 per cent using innovative techniques such as psychometric testing and qualitative credit assessment (QCA).

Most banks agree that by empowering clients by building their financial and business literacy can help capture more of the SME pie. For instance, Equity Bank has been carrying out its Financial Literacy programme for the past few years now. Chironga proposes another way is by engaging government through risk sharing, where the government could share up to 50 per cent of the risk of lending, or by establishing credit bureaus which can help reduce risk costs by 40 per cent, the latter is already in place in Kenya. But there are points of caution: Before moving to action, banks should consider whether the MSME segment is sufficiently part of the bank’s strategy and whether the bank is ready to execute at scale against the opportunity.

StanChart turns the tables on Equity to bag top bank award

By Johnstone Ole Turana, Business Daily Africa –

Standard Chartered Bank has been declared the best bank in Kenya in Banking Survey 2010, dislodging Equity which emerged the winner last year.

Barclays Bank maintained its second position with Equity Bank dropping to position three.

“Our aim is to encourage prudence and stability in the banking sector by recognising, awarding and celebrating exemplary performers and successes of the sector, consequently encouraging competition,” said Wilfred Nyangena, the chief judge.

The awards are won on a combination of merits, including financial soundness, opinion polls, market research and professional assessments.

Standard Chartered Bank was the only bank to post a double digit growth in a soft economy where banks took a hard knock on the back of subdued consumer demand for credit.

Similarly, banks had to pay higher interest rates to attract deposits, which raised their operating costs.

Bank of Baroda was declared the Best Bank in Tier II, a category for banks with total assets between Sh10 billion and Sh40 billion. In second place was Bank of India while Family Bank was third.

The strategic decision by StanChart not to join the rush for retail expansion to net more customers, choosing instead to focus on its core market, paid off with the bank recording a 43 per cent pre-tax profit growth of Sh6.7 billion from Sh4.7 billion in 2008.

“Our sterling growth confirms our business strategy of focusing on key market segment, engaging in prudent expansion and leveraging on our information technology to drive business growth”, said Richard Etemesi the bank chief executive officer while releasing the results.

For other banks the growth was largely subdued with Barclays Bank reporting a four per cent growth while Equity Bank recorded a seven per cent growth.

With the economy on a recovery path, commercial banks are returning back to the profit making territory.

The latest results for the first quarter shows that banks are turning over the leaf and are expected to post healthy returns this year.

The Banking Survey, which has different categories, recognised other achievers in the various categories.

Equity Bank was voted the best microfinance bank, KCB Bank won in the retail banking category while Barclays Bank was declared the best bank for corporate banking.

Other winners were CFC Stanbic Bank for the investment banking award, KCB Bank scooped the best bank in mortgage finance and Chase Bank was voted the fastest growing bank.

Early this year, KCB absorbed its mortgage subsidiary Savings and Loan into the mainstream allowing it to leverage on its huge balance sheet to grow its mortgage portfolio.

During the ceremony, Rueben Marambii, the managing director of National Bank of Kenya (NBK), was awarded a lifetime achievement award for his 37 years of service.

Mr Marambii has been instrumental in turning around NBK from a loss making institution to profit making bank.

Other individual feted were Alfetta Koome of CFC Stanbic Bank as the investment banker of the year and Nick Mbuvi of Barclays Bank – corporate banker award.