Hope for SMEs as Kenyan banks renew risk appetite

Hope for SMEs as Kenyan banks renew risk appetite

Small and medium enterprises (SMEs) are set to profit from the greater issuance of credit by commercial banks in 2021 as the lenders expand their threshold for risk in the New Year.

According to analysts at ICEA Lion Asset Management, banks are set to renew their appetite for risk as they chase a higher return from loan issuance.

“For the first time in five years, we expect private sector credit to hit double digits in 2021. There are a lot of hungry banks out there looking to take opportunities having been starved off high returns under disruptions emerging in the past five years including the rate cap regime and the COVID-19 pandemic,” stated ICEA Asset Manager’s Head of Research Judd Murigi.

At the same time, the resilience of SMEs in meeting loan repayments as planned in contrast with larger corporate banking clients is expected to see the new flow of credit stream in with a bias for smaller businesses.

“We’ve seen a higher rate of non-performing loans by corporate clients as opposed to SME borrowers. We think this provides a key learning opportunity for banks which have traditionally held a high risk perception for SMEs. This assessment needs readjusting.” Added Murigi.

“Banks should look at SMEs on new lenses in light of the resilience demonstrated by SME loan books.”

The rate of loan defaults by SMEs has averaged single digits of between 5 and 10 per cent in recent years while that of corporate clients have deteriorated to double digits in the same period.

The realization of greater levels of SME funding is however pegged on a change in attitudes by banks who have largely favoured government lending over extending credit to players in the economy

Commercial banks will be under pressure to deliver returns ahead of rising inflation leading to a rethink by lenders to put funds in greater earning portfolios as the return from government lending slumps.

The performance of banks is however expected to re-emerge from the 2020 slack occasioned by the COVID-19 pandemic as loan losses normalize.

Already banks are marking an improvement in debt servicing by customers following the initial pandemic hit on customer abilities to meet payments.

“Speaking to banks after their third quarter results, it was interesting to note that customers were paying back loans earlier than was expected and even sought a return to normal credit terms an indicator of positive cashflows to businesses,” noted Judd Murigi.

Private sector credit growth stood at 8.2 per cent in November rising from a lower 7.7 per cent in October according to Central Bank of Kenya (CBK) recent monetary statistics.

The growth has nevertheless remained below a 15 per cent average rate of expansion in the previous five years in spite of initiatives to boost loan issuance to SMEs such as Stawi.

Recent initiatives such the unveiling of an SME Credit Guarantee Scheme by the National Treasury are however expected to provide the much needed impetus to grow bank loans to small businesses.