Banks want cash rule eased to increase lending to SMEs

?Pushed to lend to small businesses, banks are now asking the Central Bank of Kenya (CBK) to relax regulation on cash reserves that requires them to set aside money for mitigating risks.

Kenya Bankers Association Chief Executive Habil Olaka yesterday said banks were ready to sign up to CBK’s charter on lending to SMEs, but want the regulator and the Government to offer subsidies in exchange.

“The Central Bank may come up with incentives to support the market and it will probably come out of a number of options they have like incentivising cash ratios,” Dr Olaka told Weekend Standard on the sidelines of an MoU signing ceremony between the association and the Kenya National Chamber of Commerce and Industry (KNCCI) in Nairobi.

“The more you increase exposure to the SMEs you can get some relief on cash ratio requirements, among a number of other options.”

The cash ratio is a liquidity measure that shows a company’s ability to cover its short-term obligations with only cash and cash equivalents.

According to a paper by Sterling Capital, CBK would have to allow banks to take up more risk by maintaining lower cash reserves if it wants to stimulate credit to the private sector.

Credit growth

The Economic Survey 2019 released on Thursday shows that credit to the private sector recorded a 2.4 per cent growth as at December 2018 to Sh2.42 trillion compared to a growth of 3.9 per cent as at December 2017 when Sh2.36 trillion was lent out, despite CBK cutting the benchmark lending rate twice.

Sterling Capital said the option where CBK would have to go easy on banks’ risk ratio could however lead to a buildup of bad loans and is unlikely to lead to higher credit growth.

Banks have just three days to submit plans for implementing the CBK charter, which includes committing to increasing lending to small and medium-sized business by at least 20 per cent by 2020 from the December 2017 baseline.

The partnership with KNCCI is seen as a way by banks to provide loans to SMEs in a structured way to ward off risks.

“The signing of the MoU will help SMEs represented by KNCCI and banks understand each other’s dynamics better, leverage competition and address issues around debt securities,” said Richard Ngatia, one of the contenders for president of KNCCI in polls to be held next month.

In fact, just days ago when Mr Ngatia was launching his manifesto to head the business lobby, Equity Bank pledged to open credit lines to small businesses.

“We at Equity are ready to get the Sh150 billion we have invested in Government bonds to fund members of the chamber and small businesses,” said Equity Bank Kenya Managing Director Polycarp Igathe.

Banks however want assurance they will get their money back especially if Treasury could also issue a bond guarantee where the Government may pay off if SME’s default.

Sterling Research however warns that this may came at a considerable cost to the Government.

“A similar scheme was introduced in Sri Lanka in 2016 (funded by Treasury Bond Issue), which guarantees 75 per cent of the principal amount given that an SME defaults,” said the firm.

However, in Kenya where aggregate banking sector gross loans as at September 2018 stood at Sh2.6 trillion it would require at least Sh2 trillion to cover the 75 per cent.  

oguguyu@standardmedia.co.ke