Wednesday, 29 May 2019

Step aside Fintechies,banks re-enter SME lending

Dr. James Mwangi: 
EquityBank Group CEO
 Six commercial bank groups in Kenya have resolved to lend to Micro and small enterprises, SMEs. The decision by the six, four of which are the largest banks in the country, will have a significant impact on credit to SMEs. This marks the beginning of a major price war that could benefit the borrower. 
Equity Bank group shot the first volley: It set aside US$1.5 billion to lend to the sector of the economy at 13 percent per annum probably through its EAZZy app. Soon thereafter, a consortium of five indigenous banks launched Stawi, a mobile phone app to lend to the sector amounts ranging from US$300 to $2,500.  The consortium targets some 10,000 applicants this year, which means that at least an additional US$25 million is available for the SMEs to borrow.
It is not clear how much Equity will lend per customer, but given the size of its war chest, it could lend more.
The consortium includes; Commercial Bank of Africa, the Cooperative Bank of Kenya, Diamond Trust Bank Kenya Limited, KCB Bank Limited and NIC Group.  Some are among the largest banks in the country. KCB is the leader in terms of assets followed by Equity Bank and Co-op Bank.  However, Co-op Bank will soon lose the third slot to NIC/CBA once the two banks merge. KCB is also gunning to buy National Bank of Kenya, thus maintaining its lead.
The shift marks the end of the two-year credit drought SMEs have suffered since the introduction of interest rates caps in 2016. The move, which saw banks turn to lend the government and high worth clients also cost them in terms of income. However, now that Treasury Bonds are becoming unattractive given their declining yields, commercial banks now have to turn to the real economy for business.
SMEs are the largest employers in the country and also drivers of economic growth. Most SMEs fall under the informal sector and by extension, the term informal refers to people in self-employment or small-scale industries. The informal sector is estimated to constitute 98 percent of business in Kenya, contributing 30 percent of jobs and 3 percent of Kenya’s GDP.
 That is the real sector of the economy! And starving it of credit is a recipe for an unequal distribution of the benefits of economic growth. The Kenyan economy has posted robust growth rates in the last decade, hovering around 5.5 percent.  This has pushed the real income per capita to US$1895 last year. However, the population living in absolute poverty is still in the double digits largely due to the slow-down in the growth of the informal sector.
Joshua Oigara: KCB Group CEO
The dearth of bank credit has seen the rise of fintechies, mobile phone loan apps that lend small amounts ($50-100) to small business and households. Now with the shift in policy towards lending this sector with a longer tenor and low-interest rates, the commercial banking industry has set the stage for price wars with the techies.
The apps use the Mobile phone platforms to lend. They Include Tala, M-shwari, KCB-MPesa, Branch international among others. Except for KCB M-Pesa, the others are extremely expensive.  
So the commercial banks, by easing the conditions of their loans and lowering interest rates, are headed for greener pastures.  
Although still conservative, the shift to lending to SMEs, could proof lucrative for the banking industry- and the economy. Credit to the private sector, according to the Central Bank of Kenya by 3.4 percent in the 12 months to February, way below the 12 to 15 percent level which deemed ideal to spur robust economic growth. Credit to the SMEs is a hanging fruit! They need not worry about defaults the default rate is still low. 
 Safaricom’s Fuliza, a form of an overdraft facility, which has been around for a few months, lend the equivalent of US$36 million in the first month of operation.  That is more than the stawi app plans to lend this year. This is a pointer to the high demand for credit in the country
The fintechies lend for just about a month at exorbitant rates of more than 10 percent.   This tenor is not supportive of business growth for it does not generate profits. It just generates enough to pay the loan and interest, leaving the investor with nothing to write home about. That has seen the number of defaults increase because they are just shylocks on Mobile apps. Shylocks are generally spurned attracting only the desperate cases.
But with banks now offering unsecured loans, uptake is likely to shoot through the roof as Fintechies witness a decline in business. The longer tenor and low interest rate is the magnet to attract SMEs whose major hurdle with bank loans was lack of securities to offer.

Thursday, 9 May 2019

Kenya Pioneers East Africa in PPPs

A prototype of the Mombasa
 - Nairobi Expressway
Kenya is the pioneer is Public-Private - Partnerships, PPP, in East Africa with total PPP investment estimated of $6.4 billion already committed. Of these, an estimated $2 billion is already invested in the energy sector. The balance, an estimated $4.2 billion will be sunk into roads construction.
 Public-Private- Partnerships are the provision of public services by the private sector for a fee. The private investors charge a toll in case of roads or sign PPAs with the national distributor in case of electricity.
Investors sign a 25-year concession during which period they recoup their investment plus profit as they operate the projects they build. All the contracts in the energy sector are on a Build Own and operate (BOO) model while the in road construction, the contracts are on Build Operate and Transfer (BOT ) model.
PPP projects are spread across the country in a strategy designed to ensure equitable development. For instance, the US$23 billion LAPSSET will open a second transport Corridor in Northern Kenya which forms 67 per cent of the country’s land mass.  It will comprise  of; a mega Port, a high-speed railway line, an Oil pipeline and a trunk road, all covering more than 2000 Kilometres.
The energy and roads sub-sectors are popular with investors because of growing demand in the country. The Energy sector is the clear leader in terms of the investment already sunk and rendering service to the public. An estimated 500 MW of power is already live on the national grid through P3. Wind and geothermal power generation are popular with investors. An impressive US$ 2 billion has been sunk into clean and renewable energy industry. Wind power commands a large share followed by geothermal.
The largest of these is the US$700 million, 310 MW Lake Turkana wind Project billed as the largest wind farm in Africa.  This is already generating power for the national grid at US$0.08 per unit. There two other on-going projects worth US$200 million, bringing the total investment in the Wind generation sector to uS$900 million.
Geothermal power generation has also attracted significant interest. Or Power 22, a subsidiary of the US-based Or power Inc. has over the last two decades invested an estimated US$800 million in geothermal power generation. Or Power 22 is the largest independent power producer generating some 139MW to the national grid, second only to the state-owned KenGen which generates more than 500MW.
Route Map of Lappset  Corridor.
There are three other generators contracted to produce a total of 105 MW from Menengai fields owned by GDC, the state-owned exploration firm, whose major business is to drill the Wells, cap them and sell the steam to power generators to produce electricity.
Roads are taking Lion’s share with $4.4 billion slated for investment in roads. The Mombasa –Nairobi 473 Kilometre expressway will cost US$3billion. It will raise cruising speeds to 120 Km and cut travel time between the two cities to four hours, from eight to ten hours currently.  The contract was won by Betchel Executives of the US.  This road, together with the Nairobi-Mau summit section is on the busy Northern Corridor. The Nairobi- Mau Summit section will cost US 180 million and has been awarded to a French Consortia.
 The 520 Lamu- Isiolo highway will cost US$ 620 million. It is part of the proposed $23 billion LAPSSET corridor that will open Northern Kenya and link to Ethiopia and South Sudan. It has been awarded to a South Africa, consortia involving the South Africa Development Bank. The Corridor’s infrastructure, including a standard Gauge Railway Line, and a 32 berth deep-sea port at Lamu, will be developed on PPP basis according to the LAPSSET Authority.
In Nairobi, a 43 KM elevated road linking the city’s Westlands suburb and the Jomo Kenyatta International Airport  that will cost US$567 million, has been  awarded to a Chinese contractor
Construction of these roads is expected to begin during the next financial year.
The road transport sub-sector has registered rapid growth over the last four years with its Value in GDP rising from US$5.9 billion in 2014 to $7.8 billion in 2018, a 32 per cent

growth. This makes it an attractive venture for the private sector.
The shift from government provision of public services to the private sector is a masterstroke of sorts: Apart from improving the speed of construction, it eliminates the spectre of cost escalation due to delays. It also reduces public debt while ensuring that services reach as many people as possible in the shortest possible time.