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Equity Bank branch. Equity Bank has acquired billions to lend to Small and Medium Enterprises (SMEs) hit by COVID-19. [ Photo / Equity Group ]

Equity Bank is set to receive a $50 million (Sh5.3 billion) loan from the International Financial Corporation (IFC) to lend to Small and Medium Enterprises (SMEs) hit by the COVID-19 Pandemic.

The Wold Bank Private Equity wing made the disclosure of the loan to the Kenyan bank which has taken a conservative approach in the midst of the COVID-19 Pandemic including calling back its Ksh9 billion dividend and backtracking on an expansion plan that involved acquisition of regional banks.

IFC’s loan will give Equity Bank the liquidity to lend to SMEs. The Central Bank of Kenya (CBK) projects that 75% of Kenyan SMEs will have run out of reserves by the end of June making the loan fronted to Equity a timely intervention.

“The proposed IFC investment is a senior loan of up to $50 million (Sh5.3 billion) with a tenor of one-year renewable,” IFC said in its investment disclosures.

“The investment will help expand the bank’s lending operations to the micro small and medium enterprises (MSMEs) segment in Kenya, especially to companies whose cash flows have been disrupted by the outbreak of the coronavirus pandemic.”

The new loan will cement IFC’s position as the biggest lender to the country’s second-largest bank by assets.

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Equity had borrowed Ksh17.4 billion from the global financier as of December 2019, the latest cash injection will take that number to Ksh22.7 billion.

SMEs have dominated business talk as COVID-19 continues to ravage the Kenyan economy as supply chains remain disrupted, even corporates which depend on SMEs for balance sheet resilience have become more vocal on the need to shield the SMEs from turmoil.

The small businesses have taken a beating from the restriction of movement, slowdown of the economy and the cautious approach taken by other businesses and clients.

Data posted by the Central Bank of Kenya (CBK) shows commercial banks had restructured Ksh679.9 billion in loans as at the end of May accounting for 23.4 percent of the total banking sector loan book of Ksh2.9 trillion, however, banks have also tightened the belt on further lending.

IFC says the new credit facility will empower Equity, which channels about 65 percent of its loan book to SMEs, to make new loans to customers.

“By sustaining the bank’s ability to provide working capital and trade finance, IFC’s facility is intended to promote the resilience of trade finance markets, as well as broader stability that comes about by providing for the going concern of market participants in Kenya,” the financier said.

“IFC anticipates that the project will help best position the private sector to support the economic recovery process, shortening the time it will take for the most vulnerable to return to their traditional income-earning opportunities.”

IFC did not reveal the cost of the loan but noted that it will be senior, a rank above other loans with regard to claims on the bank’s assets.

Firms that are expected to benefit from Equity’s onward lending of the IFC loan are those fitting the set criteria such as having between 10 and 300 employees or annual sales of Sh10 million to Sh1.5 billion. The loan size per borrower will range from Sh1 million to Sh200 million. Equity will become the first Kenyan bank to get a loan from IFC under its specific programme to support lenders during the pandemic.

The pending transaction marks the international financier’s increased lending to local banks, with the institution having provided billions of shillings to companies such as Co-op Bank and KCB Group.

Local banks are increasingly taking substantial loans from global funds such as the IFC, European Investment Bank (EIB) and Agence Française de Développement (AFD), attracted by relatively more favourable terms of the debt including lower interest rates and longer maturity.

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