How Equity Bank rode on SME guarantee scheme to hit record profits

As businesses died, customer footfall fizzled out and clients were defaulting, most banks started cutting back on new loans.

Equity Bank on the other hand increased its loans by a whooping Kes108 billion, the largest loan book growth in Kenya.

At the same time, rivals StanChart cut loans by Kes7.6 billion, while NCBA reduced lending by Kes2.7 billion even as Housing Finance cut Kes2.6 billion from its loans.

By March this year regional lender KCB had grown its loan book by Kes63 billion followed by Absa, which grew loans by Kes15.3 billion.

The Cooperative Bank grew loan book by Kes10.4 billion while I&M saw its loans increase by Kes10.2 billion.

Equity Bank’s aggressive lending helped propel the lender to a 64 per cent jump in net profit in the three months to March 2021 of Kes8.7 billion from Kes5.3 billion in the same period last year.

The growth can partly be credited to setting up of the second largest bank in Congo, Equity Commercial Bank of Congo (Equity BCDC) after merging Banque Commerciale du Congo (BCDC) and Equity Bank Congo (EBC).

However, Equity says the growth has been as a result of ‘keeping the lights of the economies they operate in on’.

Banks’ first quarter loan growth (Kes Billions)

Housing Finance38,40735,771
I&M 182,881193,158
Source: Company filings

Equity lending strategy was backed by taking loans from development partners to guarantee loans to SME’s and holding back dividends to have more capital to fuel onward lending to clients.

“We focused on risk mitigation and management in a challenging environment, enhanced our NPL coverage through provisions and sought collaboration with development financial institutions on credit and risk sharing guarantees. We also strengthened our capital buffers by retaining profits and withholding dividend payouts, took long-term loan facilities that strengthened our liquidity buffers,” Equity Bank boss Dr James Mwangi said.

Read also: Banks slide into Covid-19 loan default crisis

Equity Bank has signed loan deals worth over Kes62.8 billion as the lender built up liquidity to expand lending to small businesses.

The bank signed the sixth facility this year, a Kes10.9 billion loan deal with the Africa Development Bank, to allow the bank offer concessional medium term loans to the small and medium enterprises.

Last year, the bank signed a Kes5.4 billion loan facility with the International Finance Cooperation (IFC), a Kes10.9 billion from Proparco, and Kes16.5 billion loan with European Investment Bank.

The lender has also signed a Kes10.9 billion facility with European Development Banks DEG, FMO and CDC-UK and a KesSh8.25 billion loan with the African Guaranty Fund.

If SME guarantee helped Equity expand its loan book, we should hope that the state funded scheme may also unlock credit from other banks.

In September last year the Kenyan government said it will provide Sh10 billion to guarantee commercial loans for SMEs in a bid to cushion them from the economic fall-out arising from the coronavirus pandemic.

The loans would be issued through local banks which will be partly reimbursed for defaults alongside collateral provided by SMEs.

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