Kenya’s Central Bank Urges Credit Guarantee to Weather Covid-19

(Bloomberg) --

Kenya urgently needs to establish a credit-guarantee program to reduce the risk of lending to small- and mid-sized companies battered by the coronavirus pandemic, according to central bank Governor Patrick Njoroge.

Three in four small businesses in the East African economy only have cash to cover two months of requirements, Njoroge said, citing an April survey. If a guarantee plan isn’t established, “they would die quickly,” he said at a briefing on Thursday following a monetary policy committee decision to retain the signal rate at 7% after four previous consecutive cuts.

“By end June, they’re on the ropes, they’d be gone,” he said. “This is extremely urgent. The time-frame has to be as short as possible.”

His comments come as loan-loss provisions soar and Kenyan banks scrap dividends to conserve cash amid slowing economic growth and rising bad debts because of measures to contain the pandemic. Lenders have so far restructured almost 10% of their existing books to support their customers.

The National Treasury will set aside 3 billion shillings ($28 million) in capital for the scheme, according to a proposed stimulus package for the fiscal year starting in July. Njoroge did not give more details on the time-line and size of the program, saying the National Treasury was in charge of the proposals.

South Africa, the continent’s most advanced economy, last month unveiled a 200 billion-rand ($11.5-billion) guarantee program to enable banks to extend credit to businesses and support the economy in recovering from the coronavirus pandemic.

Rising Stress

Kenyan lenders have been preparing for an increase in soured loans as the pandemic poses unprecedented uncertainty for the financial system.

Equity Group Holdings on Thursday said it increased provisions to 3.12 billion shillings, compared with 410 million shillings a year earlier, as first-quarter net income slumped by 14% to 5.28 billion shillings. Loan-loss provision at KCB Group, the largest Kenyan bank by assets, more than doubled.

“With additional stresses expected to arise beginning second quarter onward, we believe additional loan loss provisions may still be required, especially as economic concerns around Covid-19 become more entrenched,” Nairobi-based Kestrel Capital (East Africa) Ltd. said in an emailed note related to Equity Group. “We anticipate a reduction in our fair value estimate of the bank.”

©2020 Bloomberg L.P.